Good day, and welcome to the Franklin Street Properties Corp. Third Quarter 2019 Results Conference Call and Webcast. All participants will be listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this call 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 Third 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.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, October 30, 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 on the Investor Relations section of our website at www.fspreit.com.Now I'll turn the call over to John Demeritt. John?

Thank you, Scott, and good morning, everyone. On today's call, I'll begin with a brief overview of our third 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 then after that, we'll 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 $24.9 million or $0.23 per share for the third quarter of '19. Turning to our balance sheet. At September 30 '19, we had about $970 million of unsecured debt outstanding, and our debt service coverage ratio is about 3.8 times. During Q3, we continued to have no balance drawn on our revolver, and the full $600 million on that's available. We have no debt maturities until November 30 of '21, and about 95% of our debt is at fixed rates.With our debt stack more termed out and our rates mostly fixed, we believe we've 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 $20 million in cash on our balance sheet at quarter end, so total liquidity of $620 million at quarter end.With that, I'll turn the call over to George. George?

Thank you, John. And again, welcome to Franklin Street Properties Third Quarter 2019 Earnings Call. In recent earnings calls, we have said that the most important metrics for FSP in 2019 and 2020 will flow from our leasing results. Importantly, the third quarter continued the strong leasing activity realized in the first half of the year. These leasing results are in the context of the large, approximately 3-year lease roll bulge that FSP is dealing with, the bulk of which occurs in 2018, 2019, 2020. It is 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 exceptional long-term growth dynamics.We have financially prepared for the cost of current leasing efforts by increasing our available liquidity as well as terming out and fixing rates on most of our debt, all of which continues to be unsecured. Much of our current 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 a meaningful net new absorption can take place. We are just beginning to realize some net new absorption in our portfolio of 32 operating properties as well as our 3 redevelopment properties, although net new absorption will be very choppy quarter-to-quarter, as we move through the large lease expirations remaining in 2019 and 2020.Specific to one of our redevelopment properties, we welcome Lennar Homes, one of America's leading home builders, to Blue Lagoon in Miami as their soon to be new corporate headquarters. We also continue to see generally rising rents and longer leases at most of our properties as we work through this period. As…

Thank you, George. Good morning, everyone. The FSP operating portfolio was 89.7% leased as of September 2019, which represents an increase from 88.1% leased as of June. The entire portfolio, including the redevelopment assets, was 88.1% leased as of September, which represents an increase from 85% leased in June. During the third quarter, as George mentioned, FSP and Lennar Homes signed a 16-year lease for approximately 156,000 square feet at Blue Lagoon in Miami. Blue Lagoon, one of our redevelopment properties, is now 73% leased. The 3 redevelopment properties were collectively 50.3% leased as of September, which is an increase from 11.9% leased as of June.Denver, our largest market, which represents 26% of the entire FSP portfolio, continues to anchor the portfolio. Leased occupancy in Denver improved to approximately 93.5% as of September compared to 90.7% at the end of 2018 and approximately 87.3% at the end of 2016. That is an improvement in leased occupancy of more than 600 basis points. The 3 CBD assets in Denver were in aggregate above 90% leased as of September. Weighted average GAAP rents in Denver now exceeds $33 per square foot as compared to $31.85 per square foot as of December 2018.Total leasing achieved for the first 9 months of 2019 was 1,139,000 square feet. Approximately 444,000 square feet was with new tenants. Based upon the net absorption year-to-date and new prospects in the pipeline, we expect to set an FSP record for new leasing in the calendar year. There are approximately 200,000 square feet of new potential tenants, properties both in redevelopment and in the operating portfolio, that are shortlisted or high probability prospects in the letter of intent stage. Barring any surprises, we expect to execute a high percentage of those new leases prior to the end of the calendar year. In terms of in-place or occupied weighted-average rental rate, the portfolio finished the third quarter at $29.81 per square footprint, compared to $29.01 per square foot at the end of 2018.The weighted average GAAP gross rental rate achieved on leasing activity for the first 9 months of the year was $32.73 per square foot. On a net rent basis, the weighted average for total leasing activity exceeded $20.50 per square footprint, as compared to $18.95 in 2018.With that, I will turn it over to Jeff Carter.

Thank you, John. Good morning. Our strategy at Franklin Street Properties is to own high-quality office properties, primarily within the U.S. Sunbelt and Mountain West regions as well as several opportunistic markets. We believe that delivering our customers excellent service at well-located and activated properties creates the conditions for value creation. The U.S. Sunbelt and Mountain West regions continue to demonstrate employment and population growth as well as quality of life ratings that exceed the national average. We believe that these conditions have the potential to positively influence rental rate appreciation over time.FSP's regional focus has continued to show encouraging signs relative to the U.S. national office market. In fact, on May 23, the U.S. Census Bureau reported that the South and West continue to have the fastest-growing cities in the United States. This report indicated that among the 15 cities or towns with the largest numeric gains between 2017 and '18 that 14 were in the South and West. On the disposition and asset recycling front, at this time, FSP broadly views our directly owned portfolio as possessing value-add upside potential. Looking ahead, we believe that our 2 remaining managed properties could be candidates for disposition during 2020, should their respective value maximization efforts conclude over the coming months. 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 5 years by completing dispositions and/or mortgage repayments of over $351 million since 2014.On the acquisition front, FSP continues to track all suitable investment opportunities within our markets. Generally though, we are seeing stronger IRR potential organically on our value-add efforts within our existing portfolio than externally through new purchases. 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.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. Lexi?

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

Yeah, good morning everybody. John, I wanted to start with you, if I could, John Donahue, on the leasing side. You said you had a good pipeline of LOIs, late-stage negotiation. And so I wanted to ask about kind of can you detail the amount of square feet you are talking about? If you said that, I had missed it. And then maybe dovetail that into the redevelopment assets and how demand is looking at those 3 particular assets, obviously, notwithstanding Lennar?

Sure. Good morning, Dave. So the amount of space that we have with those high probability prospects is approximately 200,000 square feet, and that's new leases. We have an additional approximate 200,000 square feet of potential renewals. So we're expecting a very strong fourth quarter. And barring any surprises, we think that we might be close to another record, but we'll see how that turns out.In regards to where those leases are, they are spread out across the country. There's no one predominant lease. We have a couple of prospects in Dallas, a prospect in Denver. We do have 2 prospects in Charlotte, and we have another prospect in Minneapolis. All of those prospects are at favorable leasing spreads. And we're working towards finalizing the majority of those deals prior to the end of the year. So hope to have a high batting average on those, and we'll let you know.

That's helpful. And then I wanted to ask about the WorldVentures that you have footnoted as a February commencement. I just wanted to remember if that is a GAAP or a cash commencement in February for that tenant. It's about 100,000 square feet I think.

So that tenant is going direct from a sublease with Denver. If you recall them, they wear a major tenant of ours a few years ago. So they have gone direct. And I believe there's a few months of free rent. I don't have that in front of me. But that will be -- I think that will be cash in Q2 or Q3. I'll have to get back to you on that.

Okay. That's helpful on the Denver. I appreciate that. Wanted to go back -- and this is maybe for John or John on the lease termination income. I appreciate, George, your comments about it. It sounds like the full amortization of that will be complete by the end of the year. And so we don't really see that leading from that one particular tenant into 2020. Is that correct?

Yes. So it's John Demeritt. It will be fully amortized in by the end of this year.

Okay. That's helpful. How much of the total 2019 lease term income was from that tenant?

I think it was -- total was 7.6 lease term, but there were some straight-line rent receivable write-downs that don't hit the lease termination fee income that reduced that some.

Okay. That's a gross number. Okay. Fair.

Yes. Probably close to $7 million, Dave.

Maybe net $7 million. All right. And then really quickly on the cost increase at Blue Lagoon, it was great to see the Lennar deal there. I think the cost was up about $11 million in terms of the overall project. I know you were adding some parking. It's obviously a headquarter deal, so maybe some added cost there. But can you detail the added cost? And then how much of that you think you're getting paid for in the rent and all those good things?

Sure, Dave. It's John Donahue. The majority of the price/cost increase is attributable to the parking. The amount of parking and increase in the ratio from about 3.2 per thousand up to 4.0 thousand is significant. There are a few specific items for the Lennar Homes lease such as elevators and other HVAC items that were not planned, also increasing the number. The lion's share of that is not amortized into the lease. We're still seeing strong rental spreads on that deal, double-digit IRRs. But we see the garage as a long-term asset increase, and that's not baked into the Lennar Homes lease.

Your next question comes from Rob Stevenson with Janney.

John, where are you on the bigger 2020 lease expirations? What's the known incremental known or likely move outside of that almost 1 million square feet that comes up for renewal next year?

Rob, so there really isn't any new information. As a refresher, I'll give you the rundown of the largest few. So Petrobras is expiring in the fourth quarter. We do have a small portion of that holding over for at least a month, but the lion's share of that will be expiring in Q4. We do have portions of the U.S. government leases expiring next year. Again, there is some holdover with that, and so they will likely be delayed a little bit. But we don't know exactly how long, but there will be a few of those expiring over the course of next year. And then Northrop Grumman as we talked about on a few calls, they are expiring at the end of the year. So we'll have that space to re-lease at the beginning of the year. They have been in touch with us about other subsidiaries of their company that might use the space, but we haven't finalized anything, and we're not certain that we will.So we'll be marketing that space 100%, and we've already got some early interest for the entire building from a couple of prospects. So we'll see how that goes. And then last, but not least, Jones Day. We don't expect Jones Day to vacate the park next year. We believe that will slip into 2021.

Okay. And then can you give us update on what's the current status at Innsbrook in Richmond? I guess you're still at the sort of 57% leased out for the move-out a year ago. The rent there is sub $20, the lowest in the operating portfolio.What are you guys thinking there? Is that still good prospects? I didn't hear Richmond in your list of new potential tenants, or is this something that you guys may wind up selling at current occupancy levels?

We do not have a deal in leases for Richmond at this time. We do have a mixture of medium-sized, small-sized and potentially large tenants. We're casting a wide net there, and nothing has been finalized. We are seeing those mid-sized tenants between 50,000 and 70,000 square feet that might be interested in the second half of the year occupancy. So it will likely be multi-tenanted. And hopefully, we'll have some news for you in February when we talk again, but nothing in leases at this time.

Okay. And then on the Dallas lease buyout, was there something in the lease that didn't allow them to sublease or something else? It seems strange, I mean, as you guys even alluded to yourselves that some owner will pay you 100% for the space if there wasn't severe restrictions on what they could do with it?

It is unusual, Rob. This is George. And there was nothing in the lease on that 40,000 square feet that would structurally allow them an early termination. This was a spinoff. And the company that was spinning off -- the company whose square footage is 40,000 represented simply wanted an absolute clean balance sheet. They didn't want any further lease obligations on their balance sheet after the spinoff. And so we negotiated again, truly negotiated as it wasn't part of a lease -- them leaving at year-end and paying the full rent, 100% of the rent. So it is unusual. Usually, my experience on these is at minimum in situations like this, you probably get some sort of subleasing going on or something, but that was not the case. And it was really quite an exceptional deal. I've only seen a couple things like this in my career.

Okay. Alright thanks guys. Appreciate it

Thank you. [Operator Instructions] Your next question comes from John Kim with BMO. Please go ahead.

Thank you. First question on Blue Lagoon. Where did the Lennar rents come in relative to your expectations on underwriting? And how does that impact the redevelopment yields that you're projecting?

Good morning, John. This is John Donahue. The rental rates are very strong as you would imagine from a 16-year lease. And really all we're prepared to say at this time is that we've got strong leasing spreads and that everything is going according to plan there. The details that we have are located in the supplemental on Page 24 for the redevelopment activity. But suffice to say that, that we're very pleased with the transaction.

Can you provide an update on the yield you expect for the entire redevelopment program?

Not at this time. We don't have a return on investment to provide to you. We believe that the leases themselves will be double-digit IRRs, and that the value of the property will exceed the investment at the conclusion.

Are there any other assets that could go into redevelopment as far as the upcoming lease expirations that may result in additional CapEx repositioning?

At this time, we don't think so, John. We don't have any buildings that we believe will need to be categorized as redevelopment. As we approach year-end and we look at the Northrop Grumman Stonecroft building, we will update you on that. But at this time we don't expect to have a significant repositioning of that asset.

Okay. And just to clarify. On your total operating portfolio leased percentage of 89.7%, I am assuming that does not include the expected lease termination in the fourth quarter?

That is correct.

Okay. I think George mentioned that there's a fair amount of recurring termination fees that happen every year. What do you think a good run rate is for 2020? Is it closer to the $6 million that you got last year? Or is this, your figure, more likely to occur over the next few years?

John, this is George again. We do not, relative to guidance, put line items out there as to what comprises our guidance. But I can tell you, every year there's always some allocation in our guidance for expected or planned for terminations. Most of these terminations, you sort of don't know and are always adjusting them quarter to quarter because most of them are structural to the lease. Most of them, as you know, allow an early exit with some preestablished termination fee, which usually represents some portion of an amortized CapEx that was spent upfront on the original lease. And again, sometimes the lease is terminated in full, and sometimes it's partially terminated. And so it is a moving target for us. It just happens every year with our kind of buildings, our kinds of tenants. It's just ongoing, recurring. But it can vary quite a bit from year-to-year and from quarter-to-quarter. So we -- when we give our 2020 guidance, which will be in February, there will be as part of that guidance some estimated termination fee income. This was unusual and that this really is not a structural lease termination. This was a negotiated deal between Franklin Street and this particular tenant. We actually negotiated this buyout. And so having negotiated, signed, sealed and delivered it, we thought it was unusual enough to want putting in our guidance bullet point.

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

I'd just like to thank everybody for tuning into the call. And I would like to reiterate to everyone how bullish FSP is on getting through this 3-year period and how confident we are in our property portfolio, their locations and our strategy. And thank you all for your support.

This concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.