Franklin Street Properties Corp. (FSP) Earnings Call Transcript & Summary

Good morning, and welcome to the 2021 Annual Meeting of Franklin Street Properties Corporation. I would now like to introduce the first presenter, Mr. George Carter, Chairperson of the Board and Chief Executive Officer of Franklin Street Properties. Mr. Carter?

Good morning, everyone. As said, my name is George Carter, and I am Chairman of the Board and Chief Executive Officer of Franklin Street Properties, and welcome to our 2021 Annual Meeting of Stockholders. I would now like to call this meeting to order. And due to the ongoing public health impact of the COVID-19 pandemic and to support the health and well-being of our stockholders, employees and communities, this year we are holding our annual meeting in an all virtual format and are pleased to have everyone join this live audio webcast. We have designed this meeting to seek to provide stockholders the same opportunities to participate as they would at an in-person meeting. We remain committed to returning to hold our annual meetings in person under normal circumstances. Eriel Anchondo, our Chief Operating Officer, is going to say a few words of introduction. Then the meeting will be turned over to Scott Carter, our General Counsel and Secretary, who will conduct the business portion of the meeting. And after that, I will make a few prepared remarks, and we'll follow that by a question-and-answer session. So let me now turn the meeting over to Eriel Anchondo, our Chief Operating Officer. Eriel?

Thank you, George. Good morning, everyone, and welcome to the 2021 Annual Meeting of Stockholders of Franklin Street Properties. On behalf of the Board of Directors, officers and employees, I want to thank you for your time today, your trust and interest in the company. The Board of Directors of Franklin Street Properties is comprised of 7 individuals, 6 of them being independent members. Furthermore, the audit, nominating and corporate governance and compensation committees are all comprised of independent members. I would like to introduce you to the members of the Board, starting with our independent directors. Georgia Murray. Ms. Murray has been a member of the Board since 2005 and serves as the Lead Independent Director and is also a member of the Audit Committee and the Compensation Committee. Ms. Murray is today standing for election as Director. John Burke. Mr. Burke has been a member of the Board since 2004 and serves as the Chair of the Audit Committee and is a member of the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Burke is today standing for election as Director. Brian Hansen. Mr. Hansen has been a member of the Board since 2012 and serves as the Chair of the Compensation Committee and is a member of the Audit Committee and the Nominating and Corporate Governance Committee. Kenneth Hoxsie. Mr. Hoxsie has been a member of the Board since 2016 and serves as the Chair of the Nominating and Corporate Governance Committee and is a member of the Audit Committee. Mr. Hoxsie is today standing for election as Director. Dennis McGillicuddy. Mr. McGillicuddy has been a member of the Board since 2002 and is a member of the Audit Committee. Kathryn P. O’Neil. Ms. O’Neil has been a member of the Board since 2016 and is a member of the Audit, Nominating and Corporate Governance and Compensation committees. Ms. O’Neil is today standing for election as Director. The remaining Director is George Carter, who opened the meeting and is our Chairman of the Board and Chief Executive Officer. You will be hearing back from Mr. Carter after we conclude the business portion of today's meeting. Mr. Carter is today standing for election as Director. Next, I would like to introduce you to the company's other executive officers: Jeffrey Carter, our President and Chief Investment Officer; John Demeritt, our Chief Financial Officer; Scott Carter, our General Counsel and Secretary; and John Donahue, President of FSP Property Management. Finally, I would like to introduce you to Georgia Touma, our Vice President and Director of Investor Relations. Ms. Touma will be acting as the inspector of elections today. We are fortunate to have in attendance a significant number of representatives from professional services firms with whom we do business. First, we have Tom Ward from the law firm, WilmerHale, which is the company's outside legal counsel. There are representatives from the company's independent public accounting firm, Ernst & Young, including Steve Connors and Chris MacRae. There are representatives from Marcum, the independent auditors for single asset REITs, including John McCarthy. Thank you all for being here today. And I'm now going to turn the meeting over to our General Counsel, Scott Carter, who will conduct the formal business portion of the meeting. Scott?

Thanks, Eriel, and good morning, everyone. I'm going to facilitate the business portion of the meeting. I'll then turn the meeting back over to George Carter for his remarks and a question-and-answer session. In order to conduct an orderly meeting, I call your attention to the rules of conduct posted on the virtual meeting website, which include information about participating. 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, 2020, and our most recent quarterly report on Form 10-Q, both of which are on file with the SEC. In addition, these forward-looking statements represent the company's expectations only as of today, Thursday, May 13, 2021. 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 meeting, we may refer to funds from operations or FFO and other non-GAAP financial measures. Reconciliations of FFO and other non-GAAP financial measures can be found in our filings with the SEC. As indicated in the notice of meeting and accompanying documents that were made available to all stockholders entitled to notice of and to vote at the 2021 Annual Meeting of Stockholders, we are here today to consider and vote upon the following matters: first, to elect 5 directors, each to serve for a term expiring at our 2022 Annual Meeting of Stockholders; second, to ratify our Audit Committee's appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021; third, to approve by nonbinding vote our executive compensation. Broadridge Financial Solutions has prepared an affidavit certifying that the notice of annual meeting and proxy statement were sent to all stockholders of record as of the close of business on March 1, 2021. A copy of the notice of meeting and the affidavit of mailing will be incorporated into the minutes of this meeting. The company has appointed Georgia Touma to act as inspector of elections. Georgia Touma is with us today and has taken the oath of the inspector of election. Our inspector of elections has furnished a count of the number of shares represented at this meeting in person via this virtual meeting or by proxy. There are present at this meeting in person or through representation by proxy a total of approximately 90,338,906 shares of common stock out of a total of 107,328,199 shares entitled to vote, which represents approximately 84.17% of our total shares outstanding as of the record date for this meeting. I hereby declare that a quorum exists. The polls are now open and will remain open until I announce that the polls are closed. No votes will be accepted after the polls are closed. The preliminary results of voting on these matters will be announced following the tabulation of the voting. The first matter to be voted on is the election of 5 directors, each for a term expiring at our 2022 Annual Meeting of Stockholders. The nominees for election are George J. Carter, Georgia Murray, John N. Burke, Kenneth A. Hoxsie, Kathryn P. O’Neil. The second matter to be voted on is the ratification of our Audit Committee's appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021. The third matter to be voted on is to approve on an advisory nonbinding basis the compensation of our named executive officers, as disclosed in our 2021 proxy statement. If there are any stockholders with questions relating to the proposals being voted on, please enter them now using the Q&A button on the bottom right of your screens. Stockholders may also submit other questions during the meeting, but responses to questions that do not relate to the proposals being voted on will be addressed later during the Q&A session that will follow the business portion of the meeting. We'll pause for a moment to see if we have any questions relating to the proposals. Seeing none, we will now proceed to vote. If you are a stockholder who has not yet voted or if you previously voted by proxy and wish to change your vote, you may vote by using the voting button on the bottom right of your screen. We'll pause for a moment to allow for any voting. [Voting]

Now that everyone has had an opportunity to vote, the business items on the agenda for the meeting are complete, and the polls are now closed. We now have the preliminary report of the results of the meeting. The final tabulation will be reflected in the minutes of this meeting and filed by the company in a current report on Form 8-K with the SEC. On the proposal that the nominees be elected as directors, each to serve for a term expiring in our 2022 Annual Meeting of Stockholders, approximately 78,302,726 shares were voted for the election of Mr. Carter, representing approximately 95.52% of the votes cast and approximately 3,670,809 shares were voted against. And approximately 78,393,574 shares were voted for the election of Ms. Murray, representing approximately 95.63% of the votes cast and approximately 3,579,961 shares were voted against. And approximately 77,716,297 shares were voted for the election of Mr. Burke, representing approximately 94.80% of the votes cast and approximately 4,257,238 shares were voted against. And approximately 73,634,642 shares were voted for the election of Mr. Hoxsie, representing approximately 89.82% of the votes cast and approximately 8,338,893 shares were voted against. And approximately 78,935,865 shares were voted for the election of Ms O’Neil, representing approximately 96.29% of the votes cast and approximately 3,037,670 shares were voted against. There were approximately 8,365,371 broker nonvotes. As the holders of a majority of the votes cast at this meeting have voted for each of the nominees, I hereby declare that the nominees have been elected as directors for a term expiring at our 2022 Annual Meeting of Stockholders. On the proposal to ratify our Audit Committee's appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021, approximately 89,551,834 shares have been voted for ratification, representing approximately 99.17% of votes cast. Approximately 747,184 shares have been voted against ratification and holders of approximately 39,888 shares abstained. As the holders of a majority of the votes cast at this meeting have voted for this proposal, I hereby declare that our Audit Committee's appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021, has been ratified. On the proposal to approve on a nonbinding advisory basis the compensation of our named executive officers, as disclosed in our 2021 proxy statement, approximately 78,375,296 shares have been voted for this proposal, representing approximately 95.95% of votes cast. Approximately 3,306,646 shares have been voted against this proposal. Holders of approximately 291,593 shares have abstained, and there were approximately 8,365,371 broker nonvotes. The holders of a majority of the votes cast at this meeting having voted in favor of the resolution regarding executive compensation, I hereby declare that the resolution regarding executive compensation has been approved. That concludes the business portion of the meeting. I would now like to turn the meeting back over to George Carter. George?

Thank you, Scott, and, again, good morning, fellow stockholders. I would like to begin my prepared remarks today by recognizing that the past year was, in so many ways, unprecedented for our country, the world and more specifically for most office property owners. I want to thank everyone who contributed to the successful operation of our business during this challenging time that was headlined by the COVID-19 pandemic, including frontline workers, first responders, our vendors and service providers, our tenants and their employees, FSP employees, our Board of Directors, and, of course, our loyal shareholders. Notwithstanding the specific challenges caused by the pandemic, for a full year 2020, our monthly rental collections averaged approximately 99%, and we achieved approximately 1,130,000 square feet of total leasing with new tenants, renewals and expansions. But to achieve that, we had to work hard and creatively some of our tenants to try and help them through this period. And even after everyone's best efforts, not all our tenants were able to weather the storm. It is so unfortunate for all concerned. For shareholders that have followed Franklin Street through its fourth quarter 2020 and first quarter 2021 earnings releases and calls, you know that for full year 2021, we are focused on 2 primary objectives: leasing progress and debt reduction. From a leasing perspective, we anticipate the potential for growing office space demand in our markets as a result of an improved economic situation, primarily due to increasing access to effective vaccines and therapeutics. We believe that the users of office space are now reconsidering the office densification trends of the past approximately 20 years. We also believe that even with the continuation of some planned for level of remote work-from-home flexibility, the potential reversal were slowing of office densification, along with a powerful stimulative reopening of the economy, led by the Federal Reserve's monetary policy and more directly by the federal government's direct payment of funds to much of the population could bode well for future office space absorption. Our 2021 leasing focus includes both increased economic occupancy and longer-term renewals of existing tenants. And as the vaccinations against COVID-19 continue to steadily rise in the U.S., so too, are we seeing a slow but steady increase in existing office tenants personnel returning to work at our properties, and corporate decision-makers more actively considering their future locational office space needs. Trying to determine the ultimate strength, timing and longevity of a post-pandemic U.S. and global economic reopening is a significant challenge for companies trying to make intelligent new leasing decisions today. But real on the ground, very early activities surrounding potential new leasing prospects at FSP's portfolio of properties has not been this robust since before the start of the COVID-19 pandemic. As 2021 progresses, assuming continued successful vaccination efforts against the virus, FSP is optimistic that 1 of its 2 major objectives for 2021, that is leasing progress, will achieve positive results. Our other primary objective for 2021 is debt reduction. From a debt reduction perspective, we are actively working on the potential sale of select properties that we believe have met their near-term value objectives and where we believe such value may not be fully reflected in the share price. We are reaffirming our previously announced 2021 disposition guidance to be in the range of $350 million to $450 million in aggregate gross proceeds. These disposition proceeds are intended to be used primarily for debt reduction. If successful in our property disposition efforts during 2021 and along with our previously achieved sale of our Emperor Boulevard Property in the fourth quarter of last year, FSP is projecting it will reduce its total indebtedness by approximately 35% to 50% by the end of this year. And while losing some of the current positive FFO spread that is generated between rental constants and debt constants from the property disposition debt paydown plan, we believe shareholders should maintain NAV, that is net asset value, per share with less risk to that NAV from lower debt levels, capitalizing the remaining property portfolio, while the company gains more overall flexibility in its ongoing real estate investing activities. We also believe that along with meaningful dividends that may be distributed during 2021, the remaining lower leveraged property portfolio, moving into a post COVID 2022, has a significant value-add proposition associated with it that, if achieved, could meaningfully enhance shareholder NAV values further from 2021 levels. We believe we are absolutely in the right markets with the majority of our property square footage. And to borrow a phrase from Wayne Gretzky, retired professional hockey player, "We believe we have skated to where the puck is going, not to where it has been." Many different thoughtful sources of capital are now becoming interested and positioning in our markets and are interested in some cases and exploring the possibility of acquiring certain of our properties from us in their direct investment. FSP continues to remain committed to its Sunbelt and Mountain West office focus that emphasizes markets and properties with compelling long-term population and employment growth potential that exceeds national averages. From my perspective, the most important new and different initiative at FSP this year revolves around the property disposition, debt paydown plan. Putting the effects of the COVID-19 pandemic aside, but in context acknowledging the pandemic has negatively affected us and many other office REITs over the last 14 months, all of us at Franklin Street have continued to be very disappointed in our share price for some time and have come to the recognition that FSP has difficulty in consistently generating certain of the publicly listed office REIT metrics that have become the established standard for the public equity markets to value office REIT stocks. Some of this likely has to do with the somewhat unique way the company originally built its property portfolio, and, consequently, the specific character and nature of the office properties we now own, which, as a group, can have difficulty cohesively generating certain desired ongoing recurring corporate public company REIT metrics that the stock market wants to measure to determine FSP's stock value. But we have also come to recognize that our stock's current pricing in the public stock market may not reflect our individual properties' full market value, particularly as certain individual properties are considered by different sources of both private and public capital real estate investors, who may have different opinions of those properties' values. In publicly traded REIT world, a company's stock that trades at a price below its estimated individual properties' values is said to be trading at a discount to its NAV, net asset value. At various times, public REITs can trade at discounts or premiums to their respective NAVs. Generally speaking, estimated property values to determine NAV are done by Wall Street firms or advisory firms using certain established public REIT metrics applied to the whole property portfolio, not individual analysis, appraisal or market price discovery of each individual property in that portfolio. Right now, as you might imagine, most office REIT stocks are trading at a discount to their properties' NAV. A lot of that discount right now probably reflects the uncertainty around office reopenings post-COVID, both short and long term. There are different estimates from different sources about the average public office REIT stocks discount to their NAV. But for example, the May 10, 2021 weekly report by JPMorgan estimated that the average public office REITs stock currently trades at a 6.1% discount to its NAV. I have seen ranges recently from different sources of between 2% and 12% discount to NAV. At Franklin Street, we have come to recognize that our stock may be trading materially below our individual properties' NAV. So how did we come to this recognition? We, over time, have seen properties that are directly around our properties, like type properties, trade and have started to believe this over the last several years, in particular. But most importantly, early in 2020, this is really pre-COVID, we commissioned outside professionals to evaluate each one of our properties in our 4 largest markets. When we analyzed that valuation, we again started to recognize that our stock price may not be reflective of our properties' NAV. COVID then landed on our head as everyone else's, and we got busy working with that situation. But again, very importantly, in the early fall of last year, in the early fall of 2020, when COVID was raging and when we were really getting started for the sort of second wave of COVID, we, again, went out and commissioned outside professionals to now evaluate each one of our individual properties, obviously, in all of our markets to give us their best appraisal of their in-COVID value. In other words, the price that those properties would trade at in-COVID at that time, at that moment in time. Now investment sales during COVID have been way down. They're still down, although coming back, but they certainly were substantially down during 2020 and at the time of this analysis by outside professionals. And as you might imagine, the in-COVID values would likely be less than the pre-COVID values. And in fact, they were. But not as much as you might expect. Our in-COVID values for the portfolio were actually less than 10% of the pre-COVID values. One of those properties that we've got some outside professional opinion of, we decided to test the market with, and that was our Emperor Boulevard Property in Raleigh-Durham. It was our only property there. And we, in fact, sold that property in the fourth quarter, actually December of the fourth quarter of 2020. We sold it for about $89 million. And from a price per square foot cap rate and what our outside advisers and professionals told us that property was worth, we got right in their zone and used those funds primarily to pay down debt. So if we feel the stock market is having trouble recognizing what we believe is the real current value of our properties, then we will try to directly realize some of those property values ourselves. The new and different initiative by FSP this year is to try and recognize some of this value disparity for our shareholders through select property dispositions and to give back some of that value disparity to shareholders in 2021 by: number one, paying down debt and lowering the risk to the remaining property portfolio, consequently making its NAV a higher quality NAV; and secondly, by paying dividends, our regular dividend. And if we achieve, and this is an if, if we achieve property sales of the quantity and at the price we believe we have the potential to, we are likely to generate gains on sale and taxable income that as a REIT will require us and we'll be happy to pay our shareholders a special dividend on top of the regular dividends, possibly of a meaningful amount. So let's see if FSP can do it in 2021. That is leasing progress, property dispositions, debt paydown and dividends to shareholders. Let's see if we can get through the rest of the pandemic in 2021 and truly reopen the U.S. and global economies. Let's see what office properties are doing as the economy reopens, what they look like, what the demand is in a post-pandemic 2022 world and potentially beyond. Whatever the situation is at the end of 2020, going into 2022, FSP will be better positioned to deal with it if it makes leasing progress at its properties and if it has less debt. And we will, of course, see what the stock market thinks about it all as it analyzes the execution of our 2021 plan and daily prices our publicly traded stock. Analyzing the realities that exist for FSP this year and going into 2022, the FSP Board of Directors is committed to expend all effort to determine the best path for FSP going forward that it believes has the best opportunity to unlock value for FSP shareholders. We look forward to 2021 with anticipation and optimism. That concludes some prepared remarks I have made. I hope you find them helpful. And now we'd like to see if there's any questions in the question-and-answer session. Thank you. Having no questions submitted, I would like to thank everyone for attending this meeting, and I want to wish everyone a very safe and productive rest of the year. Thank you.

Thank you. The Annual Meeting of Stockholders for Franklin Street Properties has now come to an end. Thank you for attending. You may now disconnect.