Good day and welcome to the Franklin Street Properties Corporation Third Quarter 2018 Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Mr. Scott Carter, General Counsel. Mr. Carter, the floor is yours, sir.

Good morning and welcome to the Franklin Street Properties third quarter 2018 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 Will Friend, Senior Vice President and Regional Director of Denver and Minneapolis and Patty McMullen, Senior Vice President and Regional Director of Dallas. 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, 2017 which is on file with the SEC. In addition, these forward-looking statements represent the company’s expectations only as of today, October 31, 2018. 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. 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 and after with, our CEO, George Carter, will discuss our performance in more detail and provide some of his remarks and then John Donahue will discuss recent leasing activities and then Jeff Carter 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 supplemental package and 10-Q, which were filed with the SEC last night and as Scott mentioned can be found on our website. We reported funds from operations, or FFO, of $26.2 million or $0.24 per share for the third quarter of 2018. And moving to our balance sheet at September 30, 2018, we had about $1 billion of unsecured debt outstanding and our debt service coverage ratio was about 3.6x. During the third quarter, we refinanced two term loans totaling $370 million at lowest risk spreads which we believe will reduce our interest cost at an annual rate of about $1 million. At September 30, 2018 we have no debt maturities for the next 3 years and 83% 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 five core markets. During the third quarter, two single asset REITs that we hold interest in were sold and we received $74.9 million in proceeds in an initial cash distribution from them. We used these proceeds and some operating cash to reduce the balance of our line of credit. And as a result as of the end of September, our net debt to adjusted EBITDA ratio has decreased to 6.9x. From a liquidity standpoint, we have $583 million available on our line and $10.4 million in cash on our balance sheet or total liquidity of about $593.4 million. With that, I will turn the call over to George. George?

Thank you, John and again welcome to Franklin Street Properties third quarter 2018 earnings call. As John said, our FFO for the third quarter totaled approximately $26.2 million or $0.24 per share. Importantly, leasing activity within the property portfolio remains strong in the quarter and continues that strength as we head into the fourth quarter. The energy influence markets of Houston and Denver that have caused such headwinds over the last several years continued their recent recovery and in our opinion have finally reset. Talking to many seasoned energy company executives and energy consultants leads us to believe the opportunity for sustained office occupancy increases in those markets now has the real possibility of sustainable multiyear longer term growth. A new element to this traditionally cyclical industry is the growing role of U.S. energy exports to expanding global marketplace along with requirements to build up the needed infrastructure associated with its transportation storage and refining capabilities. Our property portfolio has had significant leasehold so far in 2018 which will continue in the fourth quarter and into 2019. However, much of the square footage that is rolling and vacating is the very value-add space we purchased over the last several years when transitioning the properties portfolio from a geographically diverse set of mostly suburban office properties to a more market-focused urban infill CBD orientation. We focused our property transition on five major markets, Atlanta, Dallas, Denver, Houston and Minneapolis and now have approximately 80% of our square footage there. Virtually all these properties had meaningful amounts of space and/or leases that we are rolling over the intermediate term, 3 to 5 years after the properties were purchased and so allowed us the opportunity to purchase them at prices that were very attractive compared to much of their peer set. Assuming the risk of this intermediate-term leasehold and believing that we could take advantage of it and add value through leasing was at the core of the acquisition strategy. We believe we are taking advantage of that opportunity right now and we will continue to take advantage of that opportunity over the next 1.5 years. Once this gauge of current leasing moves through the value-add pipe, we should stabilize at better quality, higher ongoing NOIs and lower relative ongoing CapEx. At that time, the value creation is occurring today at Franklin Street Properties will be clear and the transition of the property portfolio truly complete. We have never been on a better financial condition to help achieve these value creation results. With those comments, I will turn the call over to John Donahue, President of our Property Management Company. John?

Thank you, George. Good morning, everyone. At the end of the third quarter, the FSP portfolio was 90.5% leased, which compares favorably to 89.0% leased at the end of the second quarter and 88.5% leased occupancy at the end of the first quarter. The increase in leased occupancy in Q3 was primarily due to approximately 220,000 square feet of new leases and expansions combined with no significant departures. After back-to-back quarters of strong leasing results, the year-to-date totals were approximately 1,283,000 square feet. If the fourth quarter follows the leasing pace thus far, we expect calendar 2018 to exceed 1.5 million square feet in total leasing, which will represent a record year for FSP. We continue to make progress in addressing the vacancy in our core markets and reducing the future rollover exposure. In addition to hitting our target of 90% leased by Q3, 2018, we have executed early renewals during the last 9 months for anchor tenants such as T-Mobile and Vail and extended the IRS. Demonstrating the progress made thus far, the total lease expirations for 2019 have been reduced to approximately 950,000 square feet from 1.2 million square feet as of December 2017. There is more work to do and more potential upside. There are three significant departures expected during Q4, including Fannie Mae, SunTrust, and possibly Burger King. However, we have already mitigated approximately one-third of the Fannie Mae space at Addison Circle in Dallas and activity is exceptionally strong for the Burger King space at Blue Lagoon in Miami for multi-tenant and single tenant prospects. We continue to be optimistic and encouraged by the strong leasing activity and the next five quarters appear to be very manageable with 1.5 million square feet of expirations. As George mentioned, the rebound in oil prices and the energy sector in general have contributed to improved leasing volume primarily in the energy corridor in Houston and secondarily in downtown Denver. Our Houston portfolio improved to 85.1% leased in Q3 from 79.3% in Q2. Our Denver portfolio improved to 89.6% leased in Q3 from 87.5% in Q2. We expect that trend to continue into Q4 and beyond. As we look forward into 2019, for the first time in multiple years, the fundamentals in all five core markets in our portfolio appear to be lining up to move forward in the same direction simultaneously. With that, I will turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. FSP continues to focus our efforts on creating value within our core Sunbelt and Mountain West portfolio as well as within our opportunistic non-core properties. FSP owns and operates Class A properties and amenity rich locations, many of which are experiencing both population and business expansion that can help to drive long-term property NOI growth. We believe that our core Sunbelt and Mountain West markets are well-positioned for long-term growth potential. To that end, recently the Urban Land Institute, PricewaterhouseCoopers and their emerging trends in real estate 2019 survey rated Dallas Fort Worth as their top market to watch for overall real estate prospects in 2019. Additionally, the same survey on a regional basis rated Denver as the top metropolitan area in the mountain region in terms of local outlook. In the south region, Dallas Fort Worth was rated as the top metropolitan area for local outlook with Atlanta and Houston being rated at numbers 6 and 8 respectively and Minneapolis St. Paul was rated as the top metropolitan area in the Midwest region for local outlook. As we look forward, our primary efforts will continue to be centered upon unlocking value within our portfolio through the leasing of our vacancies and on renewals and/or expansions with existing tenants. On the disposition front, during the third quarter, two of our single-asset REIT properties were sold, which resulted in initial proceeds in the FSP of approximately $75 million. We anticipate potential during the remainder of 2018 and/or more likely into the first half of 2019 for further dispositions of some of our managed properties, including some where FSP may have economic interest. We will keep the market posted as appropriate. Since 2014, FSP has completed dispositions and/or had mortgage repayments made of over $300 million.…

Thank you, sir. [Operator Instructions] The first question we have will come from Dave Rodgers of Baird. Please go ahead.

Yes, good morning everyone. Maybe John Donahue I will start with you, I had a couple of operational and leasing questions for you, maybe a quick update on 801 Marquette and leasing and timing of any movement there, and just kind of whole CCF complex and how you’re feeling about that?

Hi, Dave. Good morning. In regards to Marquette, we continue to make progress with the prospect for the second floor, and we’re expecting to finalize that here over the next couple of months so it’s stacking up well the timing has been a little bit slower than we had originally expected and certainly, would be happier to be further along at this point but we do expect to get the first floor and second floor buttoned up here shortly, which leaves us with the prime space on the top two floors and we do have a good interest in that as well, and we’re working with a couple of groups so over the next 3 to 6 months, we’re hoping to make significant progress there it’s a project, if you recall, that we had TCF vacated both buildings so significant portion of the tower, and we did lease the tower first, stabilize that and now we’re hoping to do so with 801 Marquette so did you have another question about other leasing?

Yes, I did. Thank you and I appreciate the color on that. I think in your comments you had made the comment that Burger King, Fannie Mae and SunTrust could come back to you in the fourth quarter and I guess, I just wanted an update on timing on SunTrust came back in the second quarter so I just, something maybe there on hold over, maybe Fannie’s in hold over for a little while, but just an update on timing when you will get that back and then when the new lease you’ve signed to back of Fannie’s commences?

Sure. So, the expirations for both Fannie Mae and SunTrust were at the very end of the third quarter so we do now have that space fully available and we’re working on it the Fannie Mae space in Addison Circle in Dallas has been attracting a lot of interest, both organically we have been moving around some of the existing tenants as I’ve said, we’ve mitigated about [indiscernible] that space, and we think that Addison Circle property will be stabilized fairly quickly in early next year the SunTrust space is also vacant and again, we have some organic possibilities there of existing tenants to expand nothing imminent at the moment but that property has released very well in the past, and it’s getting a strong activity so we’re open for good news in the near future at Innsbrook SunTrust at Innsbrook and then Burger King, as I mentioned in the past, their departure date is not certain they haven’t committed to a specific departure date, but we do expect them to vacate at some point in the fourth quarter by the end of the year so we have significant interest in the building it’s a little premature to forecast, the timing of replacement tenants, but we do have a multi-tenant and single tenant interest scenarios and it’s shaping up very well.

Great, that’s helpful. Maybe for George or Jeff I wanted to ask about the investments that you have in some of the single asset REITs, particularly the loans I think you have $70 million of loans outstanding, particularly at Monument and Energy Tower, given that sounds like Houston is starting to see a resurgence do you anticipate those assets being monetized in the next 12 months and that capital being put back to work in some particular way?

It’s George. Hi, Dave. We certainly hope so the Houston assets are definitely right now very, very marketable in terms of interest in the energy corridor of those kinds of properties the Monument Circle property, which is in Minneapolis will need some work first before we consider it putting that property on the market so those are two big once then we have a small outstanding loan on Satellite Place in Atlanta that’s literally being paid off poorly so that loan should circle on its own but Satellite Place is also a property that we will consider putting on the market with a little bit leasing activity that we have to do there as well so I think all of those properties, which will really finish up hold managed properties single asset REIT group really are prime for potential, an underlying growth potential disposition in the next year or 2, 2 to 3 years at the max.

Okay, great. Thank you, guys.

Next, we have Rob Stevenson of Janney.

Hi good morning guys. Given all the positive leasing, but then factory and the likely move outs what’s the net-net expected in terms of occupancy over the next couple of quarters? How should we be thinking about that? I mean you got the bump this quarter does it go back down and come back up? I mean, how should we be thinking of the peaks and valleys here over the next few quarters as the portfolio and the leasing continues to evolve?

Hi Rob, it’s John Donahue. So we do expect a little bump in the road, lease occupancy may dip a bit in Q4 and as we’ve stated our progress, will not be linear quarter-by-quarter that said, we do expect to make progress in lease occupancy over the next several quarters, the next 6 to 12 months and barring any surprises, Denver and Houston are expected to finalize more leasing in the short term and Atlanta and Minneapolis are also expected to contribute in the near term as well so yes, we do expect to make progress as 2019 progresses, but you may see a dip here between December and February.

Okay and is there any significant expected move outs in ‘19 that causes it to dip back down again? Or once we get through the next 3 months or so, it should be flat to up?

It’s hard to say at this time but my expectations are that we don’t have any significant departures known in 2019 as we did in 2018 so we’re very positive, encouraged and optimistic by discussions of our largest tenants remaining in 2019 so it’s a little premature to forecast what we thought we’ll do in the middle of the year, but we’re expecting it to move upward.

Okay and then just similarly, thinking about the ability of these leases to positive start impacting cash flow when do how should we be thinking about the stuff that you’ve done over the last couple of quarters and are working on here in the fourth quarter in terms of the concessions burning off and the rents actually flowing through into cash flow?

It’s John Donahue again I think the way to answer that question, Rob, is to talk about the physical occupancy for the portfolio and I think the way to look at this is that the dip in the physical occupancy, the trough of the physical occupancy in the portfolio will probably occur between December and February and the leasing games that we’ve made over the past several quarters should really start to make more of an impact beginning in March and April and throughout the year as we mentioned, the good news that we see the progress in the core markets, and we think that all 5 core markets will be expected to perform well simultaneously in 2019 so operations will trend more upward as we get into the back half of Q1.

Okay perfect thank you appreciate guys.

Thank you.

The next question we have will come from Craig Kucera of B. Riley FBR. Please go ahead.

Hi good morning guys your top line rental revenue was about $2 million higher than it’s been the last three quarters and your occupancy didn’t really budge and neither did your rent was there any lease termination income in that number or perhaps maybe a bump in tenant reimbursements? Any color would be appreciated.

Hi Craig, it’s John Donahue. So what you are seeing there primarily is due to the settlement with Burger King and preparing for their homebuilder so it is a onetime number that’s impacting that number significantly. And we also had, I believe, a settlement of the former bankruptcy tenant that paid us that is flowing through the nonrecurring items as well.

And do you have a sense of what the cumulative amounts in those onetime items are in revenue this quarter?

This is John Demeritt, Craig the number for Q3 was $2.5 million on that you can see that on page 8 of our supplemental if you want to see where we carved that out.

Great I’ll revisit that and I guess, it sounds like, Jeff, based on your comments regarding kind of where we are in the acquisitions and what you’re seeing, is it fair to say that the capital that you guys are recycling or the assets that you sold, you’re likely to keep the balance sheet a little delevered until you see something really exciting and/or utilize that capital to fund CapEx and maybe other items?

Craig, I think that as we look at potentially use of proceeds at this time, we’re fully open to deploy any types of available cash on whatever the best use of such proceeds would be and that may be as you said debt pay down, but we’re going to continue to look carefully at all opportunities.

Okay. And I wanted to circle back to Park 10 congrats on making the big move up and leasing there can you tell us about the tenant there and maybe when rent will commence?

Sure, Craig. It’s John Donahue. Toby Daley is not with us today he is actually in Houston, and so we can follow up with more detail if you’d like but that tenant is a 50,000 square-foot tenant all in and long-term lease, 11 years and a market package, they waved all their free rent for extra TI, and you’re seeing some of that impact flow through our leasing economics for the year, but we’re thrilled to have them and that lease I believe commences in Q2 of next year it’s a fairly quick timing to get them in, and starting rent, it moves up, I believe that’s Q2.

Alright. Thank you very much.

[Operator Instructions] The next question we have will come from Alex Nelson of BMO Capital Markets.

Hi good morning everybody. On the future asset sales, are there any plans to sell anything out of the owned portfolio, or just strictly looking to trends to manage assets? And also was it just a coincidence that this sales this quarter was a partially owned entities, or was there a particular need to exit out of the JVs?

Alex, this is Jeff Carter. We consider dispositions on an asset by asset basis with our primary objective being to maximize this value, to maximize value at the asset level at this time, we believe that a number of our non-core opportunistic properties possess potential value creation opportunities over the near to intermediate term and so we’re inclined to explore both scenarios more carefully Northern Virginia is one example where we see perspective upside potential upside in that market from a variety of things including defense spending, Apple’s announcement, the potential of Amazon, etcetera. And so, we believe we’ll look at dispositions on an asset by asset basis.

Okay. And on the leasing front, do you guys do you have the cap the gap in cash leasing spreads for the 515,000 square feet of leases this quarter? And building off of that, it looks like TI as a percentage of the signed rents have been increasing and I’m wondering if that is just a factor of the increased leasing activity this year or initial improvements you guys have offered to achieve the occupancy gains this year.

Alex, it’s John Donahue. I think I can tackle the second question and I am not sure about the first one. So, the second question regarding the rising leasing costs, those are directly due to the rising weighted average lease term in addition to the environment that office owners are faced with. As we have improved the quality of our portfolio and gone vertical over the last 5 years and as George has mentioned today in other calls, we bought some near-term role and those large tenants have rolled and we have been replacing them with quality credit tenants with long-terms. And if you look at Page 20 of our supplemental, you will see that the weighted average lease term has been creeping up. And as that has occurred, our cost per square foot per year has gone up from the mid-4s, $4.50 to $4.75 and now up to the $5, $5.25 range that’s per square foot per year. We think that, that trend will probably continue as we leased vacancy with tenants that want 10 to 15 years of term. So, it’s not surprising, it’s expected and we think that we are adding value with these long-term credits tenants.

Great. And on the leasing spreads for the third quarter?

Can you repeat that question?

Yes. Going back to Page 20 there is the increasing gap rents for the 9 months of leasing, but do you have that just for the activity in the third quarter?

We do have it somewhere, not at our fingertips here. We report the year-to-date, quarter-by-quarter. So I would have to go back and look at the second quarter report and get that here. We can do that offline if you like. I believe the first two quarters were slightly higher, so the third quarter might be slightly lower if I recall correctly.

Okay. Well, thank you.

My pleasure.

Well, I am showing no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. George Carter for any closing remarks. Sir?

Thank you, Mike. Thank you everyone for tuning into the call and we hope to see some of you as we grow next week in San Francisco. Thank you.

And we thank you sir and to the rest of the management team also for your time today. Again, the conference call has now ended. At this time, you may disconnect your lines. Thank you everyone. Take care and have a wonderful day.