Good day and welcome to the Franklin Street Properties Corp. fourth quarter and full year 2019 results conference call. 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, 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 fourth quarter and full year 2019 earnings call. With me this morning are George Carter, our Chief Executive Officer, John Demeritt, our Chief Financial Officer, Jeff Carter, 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, 2019, which is on file with the SEC.In addition, these forward-looking statements represent the company's expectations only as of today, February 12, 2020. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company's estimates or views as of any date subsequent to today.At times during this call, we may refer to funds from operations or FFO. 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 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 very brief overview of our fourth 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 will be happy to take your questions.As a reminder, our comments today will refer to our earnings release, supplemental package and the 10-K, 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 $26.8 million or $0.25 per share for the fourth quarter of 2019 and $97.5 million or $0.91 per share for the full year of 2019.Turning to our balance sheet. At December 31, 2019, we had about $970 million of unsecured debt outstanding and our debt service coverage ratio was about four times. During Q4 and as of the end of the year, we continued to have no balance drawn on our revolver and $600 million is available. We have no debt maturities until November 30, 2021 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 have aligned our capital structure with the more long-term value-add type of properties that we have in our markets. From a liquidity standpoint, we had $600 million available on the revolver, as I just said and $9.8 million in cash on our balance sheet. So total liquidity is $609.8 million at year end.With that, I will turn the call over to George. George?

Thank you John. And again, welcome to Franklin Street Properties fourth quarter and full year 2019 earnings call. As John said, our FFO for the fourth quarter and full year 2019 was $0.25 and $0.91 per share, respectively. For the full year 2019, we leased a total of approximately 1,417,000 square feet of office space in our portfolio of 32 operating and three redevelopment projects, of which 534,000 square feet was with new tenants.Over the last three years, we have averaged about 1.5 million square feet of leasing per year or about 15% per year of our approximately 9,900,000 square feet property portfolio. Upcoming existing tenant lease rollover is now expected to average about 780,000 square feet per year for both 2020 and 2021, approximately 7.9% per year of our total office space. While much of our leasing activity over the past three years has been focused on renewing or backfilling existing tenant lease rollover space, in 2020 we will seek to achieve meaningful net new absorption with the objective of increasing economic occupancy and average rental rates for years to come.At this time, we are giving full year FFO guidance for 2020 to be in an estimated range of $0.81 to $0.87 per share. This guidance includes $26,556 of lease termination fees. If we achieve the positive net new absorption we anticipate in 2020, higher economic occupancies should positively impact FSP's future rental income levels. The longer term value add proposition that was such an integral part of the strategy of recasting our property portfolio over the last 10 years is, we believe, finally at an inflection point.For commentary about activity in our property portfolio, I will now turn the call over to John Donahue, President of our property management company. John?

Thank you George. Good morning everyone. The FSP portfolio, including redevelopment assets, was 86.1% leased at the end of calendar 2019 compared to 86.4% leased as of December 2018. Total leasing achieved for the full year in 2019 was approximately 1,417,000 square feet. Approximately 534,000 square feet was with new tenants, which is a record high for new leasing.For the first time in approximately three years, the percentage of expiring leases measured by square feet in our total portfolio for the upcoming year is well below 8%. This sets a terrific opportunity to make meaningful progress on leased occupancy during the next 12 months due to a relatively light year of expirations and known departures. Due to recent progress thus far in Q1 2020 in regards to renewals, holdovers and lease extensions, there will likely be less than 7% in total tenant expirations during calendar 2020.There is a current pipeline of approximately 400,000 square feet of new prospective tenants, along with potential expansions of existing tenants that represent net absorption. Many of the prospective tenants have shortlisted FSP assets and our either in the letter of intent stage or considered strong probability prospects. Thus far, in the first quarter of 2020, we have executed approximately 20% or 80,000 square feet of the potential 400,000 square feet. Barring any surprises, we expect to execute a significant percentage of those new leases during the next three to six months.We continue to make progress with gross rents and net rents in the FSP portfolio. In terms of in-place or occupied weighted-average rental rate, the portfolio finished the year at $29.88 per square foot 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 year was $31.78 per square foot. On a net rent basis, the weighted average for total leasing activity was $19.65 per square foot as compared to $18.95 in 2018. We believe the demonstrated progress on net rents along with fewer expirations in the short term and executing longer-term leases translates to added value in the FSP portfolio.With that, I will turn it over to Jeff Carter.

Thank you John. Good morning everyone. Franklin Street Properties owns high-quality office properties in amenity rich locations within the U.S. Sunbelt, Mountain West as well as several opportunistic markets. Job growth statistics, population growth trends, cost of living data and quality of life information with respect to the Sunbelt and Mountain West regions continue to demonstrate positive potential for future upside performance where our largest markets reside. By focusing on delivering our customers excellent service in compelling locations, we believe that our portfolio is well-positioned to generate the conditions for value creation and is indeed, as George referenced, poised to experience an inflection point. FSP's regional focus has continued to show encouraging signs relative to the U.S. national office market, more specifically, data from the U.S. Census Bureau continues to show that the South and the West regions of the country are enjoying the strongest population and job market growth.On the disposition and asset recycling front, Franklin Street is positioned several years ago to substantially refocus our portfolio into several U.S. Sunbelt and Mountain West and opportunistic markets has resulted in higher quality, more infill-oriented properties that are obtaining higher rental rates and longer lease term on average than our past portfolio. FSP works d to reshape our portfolio by completing dispositions and/or mortgage repayments of over $351 million since 2014. Presently, the investment sales market nationally remains open and liquid with positive pricing for quality assets and quality locations. At FSP, we currently view our directly owned portfolio as broadly possessing upside potential that we are striving to capture. We will keep the market posted though and update as appropriate should circumstances warrant.On the acquisition front, we continue to track all suitable investment opportunities within our markets. Generally though, we continue to see stronger IRR potential organically on value-add efforts within our existing portfolio than externally through new purchases. We will continue our efforts though to identify infill and urban properties within our markets that possess the ability to add value over the short to intermediate term.And with that, we thank you for listening to our earnings conference call today. And now at this time, we would like to open up the call for any questions. Operator?

[Operator Instructions]. The first question comes from Dave Rodgers of Baird. Please go ahead.

Yes. Good morning everyone. John Donahue, I wanted to start with you on the 400,000 square feet of backlog of leasing activity that you talked about and I think you mentioned about 80,000 of that was already executed. Can you give us an update on the 80,000 and where that is? And then can you also dovetail the other 400,000 and how that might impact the lease-up of the redevelopment assets which you expect to stabilize by the end of this year?

Sure. Good morning Dave. I will start off with the 80,000 square feet. And that's a combination of new leasing and expansions, extensions. It is evenly distributed across the portfolio with occupancies across the year. No significant spike in any given quarter, but we believe that those will start immediately, some of it in the first quarter and then spread out amongst the year.And then in terms of the entire 400,000 square feet, as you recall, we had forecasted that we would anticipate almost 200,000 square feet of new deals in the fourth quarter and we were able to execute about half of those and we haven't lost the balance of those prospects. Many of them have just drifted into 2020 and we are optimistic that we will have a high batting average and land a good percentage of those over the next three to six months.We are anticipating that because those deals have been delayed a bit that a large percentage will take occupancy in the back half of the year towards the end of the year. So there could be some meaningful impact as the year goes on.

And I guess maybe just addressing the redevelopment assets, particularly, as that were, a bulk of that demand is today?

No, I wouldn't characterize it as the bulk being in the redevelopment portfolio. We have about 200,000 square feet of remaining vacancy in the three redevelopment properties. So that's a relatively small portion compared to the entire vacancy in the portfolio. We do have a few strong prospects at Forest Park in Charlotte. We can't fit all three prospects. So we are hoping to land one or two of those and get that property stabilized over the next couple of quarters.We have two strong prospects in Minneapolis, one in particular that that we have been working with from nine to 12 months that has been in an acquisition and not certain of how much space they need. We are very anxious to get that deal done and we believe that we will be able to do so shortly. And so that will be a step in getting the top two floors of Marquette multitenanted, which has been our focus here over the last couple of quarters.And then, last but not least, at Blue Lagoon, we are projecting the building to be delivered in the fourth quarter and Lennar will take occupancy then. The garage should be done by then. And we are talking with a group of smaller prospects that we hope will ramp up here over the next quarter or two as they are looking at occupancies most likely either at the very end of the year or into the first quarter of 2021.

Great. Thanks for that color. John Demeritt, on the guidance. Can you reiterate for me what George has said, I missed it, I apologize, in terms of lease termination fee income in the guidance for this year, the timing of that? And then the second component of the guidance question, can you talk about how much of the FFO, especially this back half ramp from 2019 spend number in the first quarter, how much of that is speculative leasing versus how much of that do you already know today?

I think on the back half of that question, I will probably need to refer that to John Donahue on that. But on the front half, as George said, we have $26,556 of termination fee income in the guidance and that's all in the first quarter. And that's based on what was known in the portfolio as of today. I think we have lighter lease maturities this year and next. So I think that reduces the likelihood of significant termination fees. But we will look at this quarterly as we go through the year and talk about guidance.The back half of the year does have more leasing assumptions in it, but John maybe you can talk a little bit more about that?

Sure. Dave, I think the way to look at this is that we are anticipating that we will have a ramp-up of occupancy and FFO over each successive quarter during 2020. There are a handful of contributing factors to consider including executed leases that will take occupancy during the year of approximately 370,000 square feet or so, such as Lennar and those will be contributing as the year goes on. We have recently executed holdovers, extensions and exercised options such as Jones Day that will now last throughout 2020 or into 2021. And then we have recent early renewals such as Somerset executed in the last half of 2019 with longer lease terms at higher rents that will contribute with FFO pickups in 2020. And then last but not least, the pipeline of 400,000 square feet of prospects that I mentioned earlier. So what we are expecting, barring any surprises that we will see successive ramp-up in each quarter.

Great. Thanks for that. Last question for me. George, as you set the strategy going forward, a lot of vacancy to fill up, a lot of TILC dollars to spend. How comfortable are you filling out the portfolio on your own versus how do you weigh that against maybe selling some of the vacancy and just getting focused on the assets that you want to own long term?

I think, as Jeff said, Dave, right now we think the portfolio has got a lot of value-add potential including the vacancy. And we would want to add that value-add potential before considering dispositions. But when that value-add is completed, dispositions and re-purposing those funds into acquisitions that we think have a lot more value creation to do and can be very accretive will definitely be done. But we are in almost every property that we see meaningful vacancy in now, we believe the opportunity to add value is so much great over the near and intermediate term than simply selling that vacancy now at its price.

Thank you all for the time.

The next question comes from Rob Stevenson of Janney. Please go ahead.

Good morning guys. When I take a look at the slide deck nine of the supplemental, you guys lay out the tenant improvement, the leasing commissions and the non-investment CapEx for 2019 and 2020, if I look at that and I think about 2020, 2019 was roughly $71 million, 2018 was roughly $53 million, $54 million. Where are you guys expecting those three big costs on the tenant improvement, leasing commissions and non-investment CapEx to come in? Closer to the higher level of 2019 or closer to 2018 for 2020?

It's John Demeritt. I will try and answer that question. The capital expenditures are pretty fluid and really based on a lot of leasing assumptions. But we do have a lot of leasing that we intend to do this year. So I think it would be closer to what we saw in 2019 than 2018.

Okay. And then straight-line rent in 2020. If I look at 2019 where it is roughly just under $9 million negative. In 2018, it was a slight positive. How should we be thinking about that for 2020?

Actually, I don't have a number I can quote on that one in the guidance. But I would expect it's going to be higher based on leases that we would come online. I think John mentioned, we have got 378,000 square feet of leasing, which you can see on the NAV table on page 28. Those are leases that are signed that have come online and usually they start with a few month of free rent. So the straight-line rent number should pick up this year.

Okay. And then can you talk about where you are on the U.S. government leases? I think there is a number of them that sort of have remaining lease term of, call it, a year or so or less. It seems like that given the current administration that there has been lags in terms of how long it takes to get formal leases signed and back and for the whole process to be completed? Are any of those moveouts at this point are incremental moveouts? Or you are expecting them all to renew? And what's the timetable on those?

Hi Rob. It's John Donahue. I will give you the big picture and I might ask Will Friend to give more color, if you need it. When you look at page 19 of the supplemental, we give you the expiration dates in square footage of the U.S. government leases. And we do still expect those near term expirations to be vacates at some point. However I would say that a significant one that was scheduled to expire downsize this year is going to be a holdover throughout the rest of the year and into next year. So we will give you an update next quarter exactly how that turns out. But in our projections right now, the IRS is likely to stay throughout the rest of the year. And that's up between 60,000 and 70,000 square feet of holdover. But the others really are expected to vacate at some point over the short term. And again, we will give an update next quarter.

Okay. And what about Randstad's mid-next year expiration? Where are you guys on that one?

There is nothing to report right now. They have been off and on again with engaging. So because of their staggered expirations, we believe that they will be looking for at least a mid-term kind of renewal, but too early to tell.

Okay. All right. Thanks guys. I appreciate it.

The next question comes from John Guinee of Stifel. Please go ahead.

Okay. Great. Just a nice quarter and nice guidance. Thanks. On page eight, you have a $4.4 million as non-recurring. What is that? is that a big lease term fee?

What page? Page eight? It's John Demeritt, John. Page eight of what?

Page eight under non-recurring NOI, just above the same-store.

Yes. That's the termination fees. John.

And which fee is that? Which tenant is that? Or is tenants who are now gone?

I am sorry, John. It's John Donahue. The lion's share of that number in calendar 2019 was ADS. That was a downsizing. They bought out some of the rents for a portion of their space. They are still a tenant there.

Okay. And then Northrop Grumman moved out Chantilly. What's the plan there? And big picture on Northrop Grumman? Do you know what's going on in their minds as they are also giving back 254,000 square feet at Dallas Station and a Brandywine Realty asset?

It's John Donahue again, John. So Northrop did vacate that space. That is a market that has quite a few of government contract vendors and we are seeing activity in that field, that sector. We do have one strong prospect for between 50% and 75% of the building that we are working with and waiting for a government decision on the use of that property. I am not aware of all of Northrop Grumman's contractions and consolidations in the market but we have heard about them.

Okay. And then I guess a big picture question. When you look at your guidance, right now you are at 86% leased, 83% occupied in the entire portfolio, per page 16. What's your model, say, for year-end 2020? Where will you be as a percentage leased and percentage occupied on the roughly 9.9 million square foot portfolio?

I will speak in terms of the entire portfolio, John, including the redevelopment properties. We are expecting lease commencements to really ramp up towards the end of the year. So we would expect those economic occupancies to be in the range of 85%, give or take. That really depends on us being able to work harmoniously with the tenants to get them in on time. So that could fluctuate between early Q4 and then into Q1 of 2021. But I would say that the occupancy will be in that 85% range and we hope even better.

Okay. I mean essentially if you just take your redevelopment properties of that 370,000 square feet and you subtract out Chantilly, that's Northrop Grumman that gets you there to 85%. Okay. Thanks a lot.

You are welcome.

[Operator Instructions]. The next question comes from John Kim of BMO Capital Markets. Please go ahead.

Thank you. I was wondering, can you just remind us how long it takes typically on new leases for leases that are signed to take physical occupancy?

Hi John. It's John Donahue. So the broadbrush answer to that is that the smaller the tenant typically it's a faster delivery. For example, we have signed a handful of leases here in early 2020, less than 5,000 square feet and some of those tenants are going to take occupancy within 30 days and some of those are going to take occupancy within three, four months. So the smaller the tenant, the faster the occupancy.When you are talking about prospects between 100,000 square feet and 200,000 square feet, such as Lennar, that could be 12 months, could be 24 months. It kind of depends on the type of space and what needs to be done.And then the answer for the prospects in between, anywhere from 5,000 up to 100,000 square feet, it's really a wide range depending on the quality and readiness of the space in terms of what they want and when their existing lease expires and when they want to get in. So in average, for our portfolio, it's probably just under 12 months, somewhere in the six to 12 month range as an average. That's a rough estimate.

Okay. So I mean I realize the leasing pipeline is healthy today. I am just wondering like a quarter from now, are we going to get a better sense of whether or not you are going to be able to hit your occupancy target for the year?

I would expect so. We certainly hope that a lot of this will be happening between now and the next time that we speak with you. But yes, we will have a clearer picture as every month flows by.

Okay. And then maybe a question for John Demeritt. The modest termination fees that are in guidance, typically over the last couple of years, the lease termination fees has averaged $7 million per year. Can you just remind us, is this typical of how you provide guidance only on what you foresee today? Or do you think this is actually what you are going to recognize during 2020?

Well, when we prepare guidance, we consider a number of things, the probability of what we think might happen when we come up with it. If you look at the last two years, John, they were pretty significant but there were some fairly significant ones in there. Burger King in 2018 and we have one other fairly substantial one in this past year. ADS was an unusual one as well. And when we look at guidance for 2020, we look at we actually have which is what the number that George quoted but it's generally what the sort of lighter lease maturities this year and next, I thought that reduced the likelihood of significant termination fees but we will look at this quarterly and if we see something happening, if a tenant triggers something like that, we will include it in guidance when we update each quarter.

In your history, did termination fees typically happen towards the end of the lease?

Typically it's over the last year or two before the end of a lease a tenant might have a termination fee option that they execute and then we will start to record fees that we earn from that through the period of the end of the lease. That's typically how it works.

I got it. Thank you.

Yes.

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

Thank you everyone for tuning into our earnings call. I appreciate it very much and look forward to speaking with you next quarter. Thank you.

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