Good day, and welcome to the Franklin Street Properties Corp. Second Quarter 2019 Results Conference Call and Webcast. All participants will be in 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 Mr. Scott Carter, General Counsel. Please go ahead.

Good morning and welcome to the Franklin Street Properties second quarter 2019 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, Executive Vice President of FSP Property Management; and Will Friend, also Executive Vice 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, 2018, which is on file with the SEC.In addition, these forward-looking statements represent the company’s expectations only as of today, July 31, 2019. 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 Web site at www.fspreit.com.Now, I'll turn the call over to John. John?

Thank you, Scott, and good morning, everyone. On today’s call, I’ll begin with a brief overview of our second quarter results. And 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. And after that, we’ll be happy to take questions as we usually do.As a reminder, our comments today will refer to our earnings release, supplemental package and the 10-Q, which were all filed with the SEC last night, and as Scott mentioned, can be found on our Web site.We reported funds from operations, or FFO, of $23.8 million or $0.22 per share for the second quarter of '19. On our balance sheet at June 30, we had about 970 million of unsecured debt outstanding and our debt service coverage ratio was about 3.5x.During the second quarter, one of our single asset REITs sold the property owned by it to a third party, which we had a $51 million secured loan on that property. This was repaid to us after the sale. As of the end of June, we repaid our revolver, which has no balance drawn and 600 million available to be drawn.We have no debt maturities until November 30, 2021 and about 95% of our debt is now 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 markets.From a liquidity standpoint, we had 600 million available on the revolver and 13.1 million in cash on our balance sheet. So as of the end of June, we had total liquidity of 613.1 million.With that, I’ll turn the call over to George. George?

Thank you, John. And again, welcome to Franklin Street Properties second quarter 2019 earnings call. So in last quarter’s earnings call, we said that the most important metrics for FSP in 2019 and 2020 will flow from our leasing results. Importantly, the second quarter continued the strong leasing activity realized in the first quarter to give us the best first half of leasing results of any year in the company’s history.These leasing results are in the context of the large, approximately three-year lease roll bulge that FSP is dealing with, the bulk of which occurs in 2018, 2019 and 2020. It’s a large lease roll that is both a challenge and an opportunity. We continue to be very positive and optimistic about our portfolio of office properties and the concentrations of square footage in targeted markets with strong infrastructure and long-term growth dynamics.We have financially prepared for the current leasing effort by increasing our available liquidity as well as terming out and fixing rates on much of our debt, all of which continues to be unsecured. Much of our leasing activity is renewing or backfilling existing tenant lease rollover space, but successfully handling this rollover space is important and needs to be achieved before net new absorption can take place. We believe that meaningful net new absorption is coming in 2019 and 2020 in our 32 operating properties as well as our three redevelopment properties.We also continue to see generally rising rents and longer leases at our properties as we work through this period and continue to believe 2019 is likely to be the trough in our percentage of leased space. As John Demeritt said, our FFO for the quarter was $0.22. And as noted in our earnings press release issued last night, we revised full year 2019 FFO guidance upward.For some commentary about the property portfolio activity so far in 2019, I will turn the call over to John Donahue, President of our Property Management Company. John?

Thank you, George. Good morning, everyone. The FSP operating portfolio was 88.1% leased as of June 2019. The entire portfolio, including the redevelopment assets, was 85% leased as of June.During the second quarter, we leased approximately 375,000 square feet, including 123,000 square feet leased to new tenants. For the first six months of 2019, we leased approximately 835,000 square feet, including 218,000 square feet leased to new tenants. As George mentioned, the total leasing for the first half of the year set an FSP record.Based upon the prospective tenants in the pipeline, we expect to improve net absorption and increase leased occupancy during the third quarter, and we are on pace to set an annual record for new tenant leasing in calendar 2019.There are currently over 200,000 square feet of new prospective tenants for properties both in redevelopment and in the operating portfolio that are either currently in leases or the letter of intent stage. So barring any surprises, we expect to execute the majority of those new leases during the third quarter with the balance in the fourth quarter.In terms of in-place or occupied weighted average rental rate, the portfolio continues to move upward and closer to $30 per square foot. The weighted average GAAP gross rental rate achieved on leasing activity for the first six months of the year was $31.46 per square foot. On a net rent basis, that weighted average is equal to approximately $19.50 per square foot. This annualized net rental rate also represents a new high for FSP.With that, I will turn it over to Jeff Carter.

Thank you, John. Good morning, everyone. FSP is focused on our strategy to own high-quality office properties, primarily within the U.S. Sunbelt and Mountain West regions as well as several opportunistic markets. We believe the U.S. Sunbelt and Mountain West regions have the long-run ability to experience employment and population growth above the national average, which can lead to potentially meaningful rental rate appreciation over time.This strategic view has continued to show encouraging signs on a national basis. Jones Lang LaSalle, via data supplied from the Bureau of Labor Statistics, highlights job gains within major U.S. metropolitan areas between 2010 and '19 and FSP’s five largest investment cities of Atlanta, Dallas, Denver, Houston and Minneapolis performed strongly in these results.FSP’s office properties are primarily located within infill areas that provide efficient access to amenities, transportation and housing. The U.S. economy continues to display aggregate strength with a number of economic indicators tracking positively with respect to potential office demand in well-located and high-quality properties.Investment demand for high-quality office properties remains competitive in terms of sales pricing. Cap rates remain historically low nationally. Looking across our markets, FSP continues to monitor strong demand and pricing from buyers, and we see relatively few quality properties for sale at compelling pricing.On the disposition and asset recycling front, as anticipated during our last quarterly call, the managed property, known as Energy Tower I, was sold on June 27. The property sold to an unaffiliated third party for $83.3 million or approximately $256 per square foot. The secured loan on that property from FSP totaling approximately $51 million was fully repaid at the time of closing.With respect to our strategic market focus on the U.S. Sunbelt and Mountain West areas, FSP has worked to reshape its portfolio over the past five years by completing dispositions and/or mortgage repayments of over 351 million.On the acquisition front, although the investment sales market is screening expensive, we continue our efforts to track all suitable opportunities within our markets. We continue to seek high-quality infill and urban properties in our markets that possess the ability to credibly add value over the short to intermediate term.And with that, I thank you for listening to our earnings conference call today. And at this time, we’d like to open up the call for any questions. Operator?

Thank you. We will now being the question-and-answer session. [Operator Instructions]. Our first question comes from Dave Rogers with Baird. Please go ahead.

Good morning, guys. George or John, maybe start with the FFO guidance increase. It was great to see the increase in the guidance for the full year. Maybe walk through a little bit some of the drivers of that as you guys see it for the remaining portion of the year.

Yes. Sure, Dave. It’s John Demeritt. We did the guidance based on some internal forecasts that we do and that considers a number of things. The main things, but not all, are that we’ve done a lot of leasing in the last couple of years, which we talked about in the earnings release, and we believe that’s changed our direction. Some of the leasing is coming on board that we’ve done the last year and a half or so. Sep rents is starting to move up. And as we look ahead, we’re going to get past the free rent periods and think that’s going to see – have us see an increased recoverable income and we expect to see more of that as we look ahead. We’re also capitalizing some operating expenses at two of the redevelopment properties that we have as we complete our work on them. And we have repaid some debt and fixed interest rates, so that’s had a positive impact on interest expense as we look ahead as well. And lastly, we’re optimistic about the second half of leasing, which we’ve mentioned. So those are some of the factors that went into the forecast model that we did. Hopefully, that’s helpful.

It is and I appreciate that color, John. Maybe switching over to Donahue about leasing activities, so two thoughts. One is the 200,000 square feet that you talked about. How quickly do you anticipate the uptake would be that really will impact the second half of the year it sounds like, so some color there? And then maybe dovetail that into just characterizing more activities specifically at the three redevelopment assets.

Sure. Good morning, Dave. In regards to the pipeline and where we are with prospects in lease or in LOI, we believe that the impact – the majority of the impact of those leases will be starting in the summer months of next year, the second half of next year. Hopefully, we’ll have some of the smaller midsized tenants having an immediate impact in the latter part of this year, Q4, but the lion share will be next year. The pipeline right now is exceptionally strong in a number of our markets. We are very pleased with the progress on the three redevelopment properties. Dallas has been just terrific. And we had a recent dip in Dallas because of some rolling. We have some more roll in Dallas coming in the fourth quarter, but that market has been very resilient. The assets have been garnishing interest even before we get the space back. We’re backfilling the Fannie Mae space, Addison Circle. We have heavy activity and a lot of moving pieces at Legacy Circle. So hopefully, we’ll have some things to announce soon. On the redevelopment properties, I’ll start with Forest Park. We have one prospect that we think will take the majority of the building, and then we have a number of prospects that would take a portion of the building. Either way it happens, that property will most likely be multi-tenanted and we’re excited that – we think we’ll re-stabilize that property very quickly with impact from FFO most likely beginning next year – possibly the end of this year, but most likely next year. Miami is going really well. The property has begun its freshening up with the different aspects of the building, both external and interior, and the activity has been tremendous. We’re hoping to have some progress there over the next quarter or two and we’ll keep you posted. But Miami is going really well. And then Marquette, as we mentioned last quarter and in previous calls, the top two floors are the signature space of the asset. They remain available and they really will most likely take a perfect-fit tenant. The market depth for 50,000 square feet to 70,000 square feet tenants has been disappointingly shallow, but we are working with multiple groups right now and remain hopeful that we will be able to hook one of those tenants for a perfect fit later this year.

One more for me. Can you give us an update on Jones Day? You talked a lot about it on the last quarter call. Any changes since then?

Yes, I think we are – I’ll turn that over to Toby Daley, Dave, to give you an update.

Yes, Dave. Jones Day has made it public that they are relocating to a building that’s going to be built for them over at Colony Square. So they will be vacating at the end of their term and we’re not quite sure the date that that new building is going to be ready. It’s going to be tight given their lease expiration date of next November. So we’ll see how that plays out. But they did not wish to live through a restack of their existing premises with the bottom line. And we’re looking forward to converting that building to all multi-tenant and we think there’ll be some pretty good demand for that high level of finish right at the gate to Midtown.

Great. Thanks everyone for the update.

[Operator Instructions]. Our next question comes from Craig Kucera with B. Riley FBR. Please go ahead.

Hi. Good morning, guys. In regard to the 200,000 of new prospective tenants under LOI or sort of in discussion, is that inclusive of the T-Mobile lease that commences later this quarter or is that exclusive of that?

Craig, it’s John Donahue. No, that’s not – that excludes T-Mobile. The 200,000 square feet represents all new tenants or expansions, essentially net absorption.

Got it. And in the Q, I think you guys noted that rents were up about 14% higher than their prior rents on leasing that you’ve achieved this year. As you look at the vacancies that you’re currently working through this quarter and the back half of the year, is that sort of representative of where you see market in many cases relative to where prior rents or is that a little high?

It will be all over the board depending on which asset we do the leasing at. And so some assets will be in excess of 20% and some assets might be flat to 5%. So quarter-to-quarter, it’s really hard to tell exactly where the leasing will be achieved. But in terms of the 200,000 square feet that we’re talking about, I believe that they’ll probably be somewhere in the 10% to 15% range and we’ll – on an annualized basis I think we’ll be in double digits, but quarter-to-quarter just can’t tell.

Got it. And as far as the operating expenses, there was a healthy drop. Was that just related to capitalizing some of those expenses at the redevelopments or was there anything else going on there?

This is John Demeritt again. I think capitalized operating expenses for the quarter were probably about 0.5 million. And so the rest I think we’re just doing a better job with expenses in our properties.

Okay, great. And I think you had about $700,000 of NOI that was non-recurring in the quarter. Was that just a lease termination or was there anything else there?

Yes. Terminations for the quarter were about 700,000, but they weren’t really typical termination fees. These are terminations to make way for a tenant expansions at 999 Peachtree. So it’s a positive as we look ahead.

Got it. And one more for me and I’ll hop off. You guys reduced the dividend last year. And I think just with the amount of leasing you’re doing and the expense affiliated with that, AFFO is still light at the dividend. Is the Board comfortable just given your liquidity – your expanding liquidity from the standpoint of the current dividend going forward or is there any reconsideration there at a lower AFFO run rate?

Hi, Craig. It’s George Carter. I can tell you that first of all, as I say all the time, the Board always every quarter makes a determination of the dividend. But I can also tell you that the Board is very comfortable with our dividend and the levels of AFFO that we’re experiencing, and that will be very volatile quarter-to-quarter. We’ve had, for example, last year – for full year '18, our AFFO was $0.47. We don’t forecast AFFO. But if we’re not doing the leasing that needs to be done, then we’re not spending the CapEx and leasing dollars. And we are – we again have been doing a lot of leasing. I think we will continue to do a lot of leasing. And so that AFFO number is likely to be quite volatile quarter-to-quarter. And again, Board is very comfortable with that number, anticipated it, as you mentioned, reduced the dividend to help with it. We increased our liquidity. We’re at our maximum liquidity we’ve been in since I can remember, so we’re ready for the leasing challenge. And again, currently the Board is very comfortable with the AFFO number and the dividend.

Okay. Thank you.

Our next question comes from Dave Rogers with Baird. Please go ahead.

Hi, guys. Just a couple of follow ups and I don’t know if this is for John or John. But on the Blue Lagoon asset, you’re adding about $123 a foot and I know you’re doing structured parking there. But how do you feel about the return on that from a rent perspective? And what’s the all-in basis when you get done with that?

Dave, it’s John Donahue. So in terms of what we’re investing in, we are looking at the parking enhancements as a long-term investment not just on the current leasing, but we’re seeing in the market that there is a greater demand for higher parking and higher rents that we expected. So we think the returns are going to be very, very good both in terms of leasing spreads, but also in terms of IRR. Our total investment is estimated on Page 23 of the supplemental and we’ll keep updating that for you. I don’t have at my fingertips the all-in basis on a book value, but we certainly believe that there is a premium to the value – the stabilized leased value of the building over that basis.

Thanks. That’s helpful. Just wanted to confirm with Petrobras and Northrop that there’s no real chance of keeping them at this point, right?

Agree. We don’t think there is much chance of either tenant holding over or extending. I will caveat that with we’ve had a last minute request by Northrop Grumman in the past and we all know what’s going on with the defense contracting in the country. So I would put a very small chance, remote possibility of that happening, but it is possible.

And then lastly, just maybe for Jeff, on disposition. Obviously, the market’s pretty frothy out there and I know would take FFO perhaps in the wrong direction, but have you guys considered more in the way of dispositions and monetize some assets at this point?

Hi, Dave. Right now, we are very content with the way the portfolio outlines. We think there is a healthy balance of opportunity inside the portfolio. And so I would not anticipate more dispositions this year from our directly operating portfolio. Possible on the managed side and we’ll keep the market posted as we go forward.

Okay. Thank you.

Since there are no further questions at this time, we will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. George Carter for closing remarks.

I just want to thank everybody for tuning in and listening to the call, and we very much look forward to next quarter’s call. Thanks, again.

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