Good morning and welcome to the Franklin Street Properties Corp. First Quarter 2020 Results Conference Call. All participants will be in a 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 Scott Carter, General Counsel. Please go ahead.

Good morning and welcome to the Franklin Street Properties first quarter 2020 earnings call. Joining me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeff Carter, our President and Chief Investment Officer; John Donahue, President of FSP Property Management; and Eriel Anchondo, our Chief Operating Officer. Also joining 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 provision 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, as updated with a COVID-19 pandemic in the Risk Factors section of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, both of which are on file with the SEC.In addition, these forward-looking statements represent the company's expectations only as of today, May 1, 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. Reconciliations of FFO and other non-GAAP financial measures to GAAP net income are contained in the 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 George Carter. George?

Thank you, Scott. Good morning everyone and welcome to Franklin Street Properties first quarter 2020 earnings call.We will do this call a little differently from past calls as our home office State of Massachusetts non-essentials business closure has been extended by Governor Baker until May 18. FSP home office personnel are currently working remotely. With that reality presenting itself, we did try to give more color on our first quarter by written word in our earnings release last night. I encourage you to read it.I will give a few prepared remarks and John Donahue will talk about our property portfolio operations. After that, we will open up the call for questions. All of our executive team are on the call and will be available to answer questions.First, I would like to thank, on behalf of all of us at FSP, all the people on the frontlines of this Black Swan COVID-19 pandemic. They obviously include first responders such as healthcare workers, but also all the other deemed essential business workers who without hesitation stand post every day in the face of increased personal risk to keep the support systems of our country operating.Our people on-site operating FSP properties: property managers, maintenance engineers, security personnel, cleaning crews, and many others. Our tenants who have been so engaged, communicative, and supportive of necessary operations in our buildings. If there is any bright spot in the darkness of this tough time for America and the world, it is the brave and unselfish way, so many have stood up and pulled together for a common cause. It seems to be a rarer and rarer thing in recent years. Could be some important perspective for the future.Franklin Street Properties started 2020 with the objective and excellent opportunity to add meaningful net new tenant absorption at…

Thank you, George. Good morning, everyone.FSP started the year off with a strong first quarter of new leases. As George mentioned, the 144,000 square feet of new leases set our first quarter record for FSP. The vast majority of those leases are scheduled to commence in the second half of 2020.In regards to our active pipeline of prospective tenants, we're currently tracking approximately 300,000 square feet of new prospects that have shortlisted FSP buildings and continue to communicate the need to commit and execute within three to six months.The prospects that have planned occupancy needs in calendar 2021, and beyond, for the most part have paused and we believe we'll likely reengage over the summer months. We continue to communicate with all prospects. The majority of active FSP prospects have not adjusted their square footage needs downward. However, many of those active prospects are looking to re-plan with architects to rethink density and the future uses of space.Existing tenants in discussions to expand or renew have also paused for the most part, as they also want to readdress how they use space and review their pace of growth.Rent collections for April totaled approximately 98% thus far. Tenants began to inquire about rent relief in mid-March. FSP implemented a proactive approach to work closely with our tenants with information submittals, review of financial conditions, and numerous phone calls, in order to distinguish between those truly needing some form of relief from those that did not, and were seeking to opportunistically capitalize. Although it is much too early to predict or provide estimates for May rent collections and beyond, FSP has been working with our tenants that have requested some form of rent relief.To-date, we have been in discussions with these tenants regarding amended lease terms for rent deferrals, representing approximately 1%…

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

Yes, good morning everyone. Hope you're all doing well. John Donahue, I will start with you. I think in the press release you said 356,000 square feet of remaining expiration, 388,000 square feet of executed leases. I assume all 388,000 are anticipated at this point to start this year and can you give us some color on the 356,000 of expirations, how much of that is kind of been renewed, how much leaves, and how much is kind of been backfilled, do you have a sense of where that's coming from?

Hi Dave, it’s John. Thank you. Yes, the majority of the 380,000 square feet are still expected to commence this year.In regards to the 356,000 square feet on our expirations for calendar 2020, we do believe that there will be an amendment signed by the IRS shortly any day now and that will knock that down below 300,000 square feet for remaining expirations for this year. And then for the remainder, we don't know at this time exactly how many of those renew, we do believe we'll have some renewals. But as I mentioned in my prepared remarks, some of that has slowed down or paused. We have since at the end of the first quarter executed one amendment. So there will be some renewals. We just don't know how many yet.

And in the IRS, it sounds like it's not done. Is that just a short-term push out? Or does that kind of push it out beyond 2021 and give you some more time there?

Yes. As I had previously commented, I think on the last call or two, their staging at Broadway 1999 Broadway has been going slower than anticipated. So they're downsizing, which we expected to come into effect this year in the first half of the year is pushed out until early 2021. So that's a little over 60,000 square feet or so that will not come back to us this year that'll be pushed into next year.

Okay. And then I guess with regard to next year as well any thoughts on Jones Day? I know that's still ways out there from a construction standpoint, but they need somewhat a move into. So are those discussions continuing or have they slowed down?

Yes, Toby Daley, our Regional Director for Atlanta is on the call. And I'd ask Toby to give you some color on Jones Day, Toby?

Hi, Dave. The Jones Day lease is scheduled to expire at the end of May of next year and construction in Atlanta despite the pandemic has continued and the reports that we're getting back from Jones Day's broker is that their construction is actually ahead of schedule. So we continue to count on Jones Day surrendering the space in May and that's how we've been marketing the space to prospective tenants and we've had strong interest in single floors and multiple floors in that building. So we're very pleased with the initial interest in tours and granted the last few weeks have been a bit slow in terms of tour activity. But we're still working with prospects remotely over the phone and that's what we know today. There is always a chance that Jones Day could require more time for its new building to be completed. But by all accounts that could be a 30 to 90-day holdover and not any time longer than that.

Great, thanks for the color, Toby. John, another one for you on the 300,000 square feet of new prospects, you said that that has interest in kind of executing in the next three to six months. I mean how much of that is a 2020 move-in, I would assume very small but is more of a 2021 impact. But I mean, I guess pre-COVID how would you have seen that playing out?

I think you're right, Dave, as a general rule, however the reason that there's a sense of urgency with a large number of those prospects, there will be some commencements in the back half of the year probably late in the fourth quarter. The larger the prospect, which is probably about half of that square footage or a little bit more; they are looking at Q1 of 2021 or beyond. But it is apparent to us that they have a sense of urgency.

And then last question for you, John, is how much of that pipeline, the 300,000 is kind of redevelopment oriented in the three projects that you previously detailed versus just the core portfolio?

It's spread across the country. We have one prospect in particular -- two really good prospects for Minneapolis. One of them would straddle both of the buildings there, both Marquette and the 121 South Eighth. We do have a prospect for Miami and we also have another prospect for Charlotte. We do have some encouraging activity in Northern Virginia and in Richmond. So a lot of it is I guess, I would say it's spread across the portfolio.

The next question will come from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. What percentage of your tenants are on electronic pay versus old school mailing a check into you guys. And so when in the month do you basically know what your collections are going to wind up being?

Rob, this is Jon Demeritt. I don't have an answer for you on that. We have collections that come in via wire ACH, we have a lockbox and then we have standard mail as well. But I don't have broken out like that where I could quote your percentages. But generally, we get a good amount of the rent in the first few weeks. First two weeks rather, and we have some tenants that pay in arrears particularly the government ones, so it can be later on in the month.

Okay. So you guys got to be communicating monthly collections each month going forward until things start to return to normal, or is that a one-off thing ahead of earnings here?

I think we probably talked about it in our next quarter. I don't think we're going to be -- I wasn't planning on putting out press releases of cash collections each month in April and May.

Okay. I mean at this point is the expectation that the -- that May collections are going to be materially lower than April or is anybody's guess at this point?

We really have no idea at this point. We don't -- we've got a lot of tenant discussions going on as I think we put in the disclosures so a lot of these depending on how that works out. I'm expecting that will be very busy in May trying to clear that.

Okay. And what were you seeing demand wise in Houston and to a lesser extent, Denver pre-COVID in January and February, given that where oil started rolling over below 60 bucks a barrel. And were your -- any of your existing oil and gas tenants looking to sublet at that point? Or is it really only been since the real major plummet from 40 to below 20 during COVID?

Rob it's John Donahue. I'm going to ask both Will Friend and Toby to comment on Denver and Houston respectively. But generally speaking, we have not seen much in the form of communication regarding rent relief from the oil, energy, oil and gas markets. We've been very fortunate thus far and we're monitoring that closely.I'll start with Will Friend, who's our Regional Director in Denver. Will, do you have any color for Denver?

Hey Rob, this is Will. I think John's comments are spot on for Denver for our portfolio, we've seen really no space being on the market for subletting have had very few oil and gas tenants that have even reached out for rent relief at this point. Let's not assume we haven't had any but none of them are our major oil and gas tenants that tend to be the smaller service type.But demand we do have a couple of oil and gas companies that we've been talking to even during COVID about space needs. They're slow moving, but they continue to respond. So that may not be the case for the market as a whole but in our portfolio, that's what we're seeing on the ground.

Okay.

Toby, are you there, how about Houston?

Yes, Rob, Toby Daley here. The Houston, pretty amazing, I think we were approaching 99% collections for the month of April. And I think there are only two tenants in Houston that made no April payment. And those two payments totaled $4,400. So right now our tenant base is strong. We lost Petrobras who was suffering at the end of last year that we lost 144,000 square feet at Westchase that we're currently marketing. But the rest of our tenant base has been surprisingly strong and we've had very few requests for relief and any most of the requests that we have received have been coming from doctors' offices, small retailers, but not the big oil and gas firms. So we're optimistic that this will continue.

Where was the demand pre-COVID for space in Houston, what industry groups were, if you were to go back and sort of look at who was out there looking in the market, how would you characterize the industries in Houston that were looking for incremental space back in January and early February?

Yes. I would say it was a mix of financial service firms and oil and gas engineering firms that we're looking at that time and for the most part, have hit pause but we still have a few prospects. I think we have 120,000 square foot tour next week for Westchase.

Okay. And last from me, John Demeritt, what debt covenants or covenants would be most problematic if you had to start deferring a greater amount of rent. And if you started having conversation with the lenders about temporary waivers just in case?

Well, the accounting rules work. If you have reason to believe that your lease is collectible, and you have a loan -- a lease agreement or other agreements that you do, where you're deferring rents that are going to be repaid at a future point, there wouldn't be any write-offs associated with that. If we think a tenant or a lease is not collectible, then we have write-offs of receivables and then we go on a cash basis with that tenant.Obviously, if a tenant were filed for bankruptcy, the same accounting treatment would happen. And so I don't have a handle right now on what actual write-offs or losses we would need to have. So in order for us to have covenant issue, we'd have to have pretty significant write-offs in a quarter such that we could be impacted by a sort of a loan to value covenant that's based on a property NOI capped out. But I don't have a reason to ask for covenant relief right now. I have talked with most of the banks of the Bank Group and told them that this is a risk but I just can't see where we're right now until we work through tenant issues. And said, I've raised my hand if I thought I was going to have an issue.

Our next question will be from Joab Dempsey with Stifel. Please go ahead.

Hi, good morning everyone and thanks for taking my questions. Just wanted to start-off with a question regarding the dividend. In this post-COVID world, many -- your peers are evaluating the dividend if it still works for the company, by our calculations Franklin REIT is not covering the dividend currently and again by our calculation might not for the next three years, any thoughts about possibly cutting it again?

Hi Joab, this is George Carter. I give you the answer that I get every time I'm asked this question and is the honest answer. We make that decision as a board each and every quarter and look at everything in that decision. So it is a quarter-by-quarter effort.

Okay, great, great. And then just turning to the supplement, it looks like you have $30 million outstanding in a note payable. How do you guys see that money being used and any plans to tap the fixed income market more in the next few quarters to say cover a CapEx spend or dividend spend or anything like that?

Joab, it's John Demeritt. We had $30 million drawn on our $600 million line of credit at the end of March. So we've got $570 million worth of availability. I did draw down a little bit of cash in the beginning of April when things were getting a little hot around the country just have some extra cash on hand. So our cash balances today are around $43 million which we think are going to be fine for a while. So I think we have plenty of availability. So not planning on raising any new debt at this time. And so that's where we are. We think we've got plenty of availability.

Okay, great. And then just lastly from me, I know it's a challenging time in the office sales market right now. Any planned asset sales in the company's future?

Hi, Joab, this is Jeff Carter. Right now, the investment sales market is largely shut down. But in general, as I've said in the last quarter, and past quarters, Franklin Street really feels that our portfolio has a strong mix of value opportunities. And our intention is to realize that value and once that value is realized every month, every assets always potentially available for sale at that time. And so we will look to evaluate the portfolio once -- once and properties once we've maximized value. But no at this time, we don't have any assets that we're considering for disposition.

Okay, great. Thanks for taking my questions again, you guys stay safe, okay.

Thanks.

Thanks, Joab.

[Operator Instructions].Our next question will be from John Kim with BMO Capital Markets. Please go ahead.

Thanks. Good morning. George, you mentioned that new leasing activity has really slowed down. I'm wondering if you're getting any visibility either from the brokerage community or from tenants of physical tours increasing when certain place regulations come off.

Hi, John. Let me just pass that question over to John Donahue, I think he has got some color on that, John?

Hey, John. Yes, there certainly has been a pause and a slowdown for new prospects over the last 30, 45 days. I think that that's universal across all portfolios. As you would expect, the need for virtual tours has picked up and we've been doing more and more of that. Really, you differentiate between those prospects that have an urgent need versus those that were way out in front of their occupancy needs.So for material large prospects, we typically are out in the market a year or more in advance. And so where we're seeing those progress and move towards hopefully lease execution, they're certainly up against it and have a need to get something done. Those that don't have the luxury of re-planning and getting a better sense of their growth and what they might need for density and versus the work from home dynamic.So while we expect re-entry to occur soon and we're in the Mountain West and Sunbelt regions and we think that will fare better than some others that are in the Northeast, but we just don't know exactly when they're going to get out there and really engage full tilt, we do expect it to pick-up, just don't know how fast that'll happen.

How impactful do you think virtual tours are currently? Can new tenants go into the space and make a final decision without physically seeing the space? Are they at that level yet?

I think that for the most part, the majority of these tenants when it comes to a virtual tour, they're relying on their representation. Their tenant reps have been in these buildings many, many times. And so they're not traveling across the country to do a physical tour. But to the extent that they're regional or local, they're getting into these buildings. We've had two major tours above 100,000 square feet in the last 10 days. So it is happening.How effective are virtual tours? I think they're amazing and I think that they're effective, but it doesn't replace touching and feeling where you're going to live. So I think it's temporary and it moves the ball down the field, but they're going to have to get in the space.

Okay. The leasing prospects that are in the Q and they're still progressing. Have there been discussions of changes in economic terms or structural terms of belief as far as adding any pandemic clauses in them?

Yes, interesting question. In regards to re-trading deals that has not been an issue for us at this time. The majority of those prospects that have gone down the road and now they're either in leases or finalizing LOIs, we haven't seen re-trades. The prospects that do have the luxury of pausing have commented some extent that they want to see how this falls out and if they will get a better deal in the future. So that certainly is possible.But I think on the forefront of their minds is balancing what I get categorized as the density versus the work-from-home. So much is being discussed; so many assumptions and guesses are being made. We're not seeing our active prospects adjust their space downward. In fact, I think they might actually do the opposite as they're forced to make a decision over the next three to six months because of what's happening in the country right now. I'm sorry; I forgot the second part of your question. Can you repeat the second part?

If there's any pandemic-related clauses that are being requested for the leases?

Yes, we have seen that crop up already. As you're probably well aware, the Force Majeure clause for the LION's share of leases across the country does not include pandemic. And we're now seeing Attorneys jump all over that even on the renewals that we have seen that there is dialogue on that part of the lease for sure.

Just one more for the tenants who have asked for rent relief or that your concerns may ask for relief in the future, is there any generalizations that you could provide as far as what interest is there in, is it oil and gas or is it spread out to other sectors?

Yes, I can answer that. I think the best way to answer that question is that there are no surprises, John. The tenants that did not pay rent in April and are likely to not pay in the near future are exactly those that you would expect or assume it's the small retailers, including the delis and cafes that represent the largest number of tenants in our portfolio that didn't pay rent. But as you know that represents an extremely small percentage of FSP's square footage and annualized rents as evidenced by our collections in April.Next, I would categorize the flexible office industry which would obviously include co-working and to some extent, the executive suites. That's another category that has been reaching out for rent relief. Again, FSP has a very small exposure, very small percentage of our portfolio by square footage and annualized rents again as you can see in our collections for April.And then the last industry category that I would touch on is broadly the entertainment industry and for us that would include the resorts or vacations, global travel timeshares, et cetera and those types of tenants are in discussions for some potential deferred rent of varying lengths of time. So that segment for FSP would represent the larger percentage of our square footage in the annualized rents. We're very engaged with them in discussing amendments and we'll be monitoring them closely.

What is your exposure to co-working?

Our exposure to co-working is between 1% and 2% of our portfolio, very small.

Our next question is a follow-up question from Dave Rodgers with Baird. Please go ahead.

Yes, hey, George, a question for you. And I think John Donahue was asked about energy exposure and the risk on the leases. And I think, Toby and Will both addressed it as well. But as you guys think about exposure to Houston, Denver, Minneapolis, I mean one of the office REITs or maybe the office REIT maybe with the most exposure to what would be perceived energy risk market coming under pressure again for multiple times in the last 20 years, how confident are you in that kind of what is perceived outsized energy exposure in the portfolio in your selected five markets versus maybe how you should be positioned in the future, any thoughts there'd be helpful. Thank you.

Yes, Dave. We started this company over 25 years ago on a different name on and then, but we started in Houston. Our exposure for example to Houston has been long and before FSP, I was in Houston with other firms' real estate for the last 50 years. And so these cycles in energy are pretty well-known to me and to our team, Toby Daley, who analyst, for example, he actually lived in Houston for a period of time.And so we're -- the answer, the short answer to your question we're very comfortable in the energy markets understand their cycles. The recent -- the recent -- very recent situation in the energy markets is really extraordinary and its uniqueness because the big downer price of oil came from demand destruction from COVID-19. We've never seen that sort of quick cut-off in demand destruction in the past. And there's an old saying in the oil patch that the biggest cure for too much oil is lower oil prices.And I think if you believe that this pandemic ends and demand starts to return closer to normal over the next six to 24 months and you believe that the supply spigots have started to be turned off because there's no place to put it one. And two, there's a number of political things going on that probably will affect supply as well. Then our view is strongly that the energy markets actually offer a terrific opportunity. And we plan to stay in those energy markets.If you said are we going to expand today in Houston before we have a vision of that future, that's a little firmer? No, but we are very, very comfortable with our properties there and certainly in Denver as well.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back to George Carter for any closing remarks.

Just like to thank everybody for tuning in and want everybody to stay safe. And we'll all get through this and look forward to brighter days, they're coming. Thank you very much. Talk to you next quarter.

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