Franklin Street Properties Corp (FSP) 2005 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the third quarter 2005 Franklin Street Properties earnings conference call. (Operator instructions) I would now like to turn the call over to Mr. Scott Carter ,Senior Vice President and In-House Counsel. You may proceed, sir.

Good morning and thank you for participating in this call. With me this morning is George Carter, our chief executive officer, and John Demeritt, our chief financial officer. Before I turn the call over to John Demeritt, I must read the following statement.

Please note that various remarks that we may make about future expectations, plans and prospects for the company 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 "Certain Factors That May Affect Future Results" section included in our recent report on Form 10-Q for the quarter ended June 30, 2005, which is on file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today. 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 cash available for distribution or CAD. A reconciliation of CAD to GAAP net income is contained in yesterday's press release, which is available in the investor relations section of our website, www.franklinstreetproperties.com.

Now, I will turn the call over to John Demeritt, our chief financial officer.

Thank you, Scott. Welcome to our first earnings call. We are very happy to be here to talk with you about our third quarter. What I plan to cover is first to go over some of the performance measures that we consider important and second, to present our results for the three and nine-month periods. And then, I'll highlight the three most significant changes comparing 2005 to 2004. After that, I want to update you on some asset sale activity and a dividend press release that we recently had. And then, I'll turn the call over to George Carter, our CEO, who will talk with you more about Franklin Street and discuss more fully our results and activities.

We evaluate our performance based on net income or EPS and CAD and believe each is a very important measure. Net income is a measure that follows generally accepted accounting principles or GAAP. And GAAP reporting includes gains or losses on sales of real estate, which we believe REITs should be measured by. We also consider cash available for distribution or CAD an important measure. And this is a measure of cash operations of our company, similar to other REITs. CAD, essentially, is net income excluding gains and losses from asset sales and adds back or excludes depreciation, amortization and some non-cash items.

As Scott mentioned, there's a detailed definition in our press release and we also include one in our quarterly and annual SEC reporting, which I encourage you to read. We do reconcile net income to CAD in these earnings releases and also on the segment footnote in our quarterly reports if you're interested for getting into more detail with them. We consider both EPS and CAD when we determine the amount and the composition of distributions to be paid to shareholders.

Our EPS for the quarter was $0.44 compared to $0.14 per share in '04, which is a substantial increase of $0.30 over last year. Net income was $26.8 million for the third quarter of 2005 compared to $6.9 million for 2004. One thing to keep in mind here, comparing '05 to '04, is that we issued about $10.9 million shares at the end of April, to complete a merger, so the dollar increases are greater than the per share increases might indicate. And that's because it's based on weighted average shares for both periods presented.

Our CAD for the quarter was $0.31 per share compared to $0.21 per share in '04, which was also a significant increase. CAD was $18.7 million for the third quarter compared to 10.3 million for '04. Our EPS for the year-to-date nine-month period was $0.84 per share compared to $0.68 in '04 or a $0.16 increase over last year. In dollars, net income was $46.7 million for the nine months of '05 compared to $33.8 million for '04.

Our CAD for the year-to-day nine-month period was $0.86 compared to $0.87 in '04. This decrease is really rounding when you do the math, but on a dollar basis, we had an increase, year-over-year, of $5 million in CAD. The reason for the per share impact being fairly flat or down a penny was the impact of shares issued in the merger that I discussed a minute ago. CAD for the nine months was $48 million compared to $43 million for 2004.

The three most significant reasons for the increases in EPS and CAD were first, the merger that I alluded to earlier. We merged four properties into our portfolio, which increased net operating income for the third quarter and also for five of the nine months in '05 compared to 2004. We also had acquisitions of two properties. One in Colorado that we purchased in the middle of the first quarter and the other in Indiana that we purchased in the beginning of the third quarter.

The purchase price of these properties was financed with asset sales of properties in the portfolio, but the timing of these transactions was such that we initially bought these properties and earned the spread between the yield in the assets and our cost on the line of credit. We then decided to retain these assets for our portfolio and the proceeds that we received from asset sales since then we used to complete the transaction. The last two asset sales that we had in the beginning of October we used to pay off our line and, as of this moment, we don't have any amount outstanding on our line of credit.

The second highlight is the gains on sale of assets for the three and nine-month periods in '05 worth $14.3 million and $13.2 million respectively. The reason the year-to-date gains are $1.1 million lower than the third quarter is that we sold an asset at a loss that was estimated and recorded in our second quarter. The sales in the third quarter included a residential property in Louisiana and a sale by transfer of interest in the property in Maryland. Both were sold in at a combined gain of $14 million.

We also had a gain on contribution of land to the Park Ten Development entity that we had a press release about at a small gain of about $300,000. Net gains on EPS were $0.24 for both the three and nine-month periods from these transactions.

Lastly, stronger investment banking results were a highlight for the third quarter. The nature of investment banking is transactional and our investment banking revenue is based on gross proceeds from the sale of securities in the entities that we sponsor.

For the third quarter of 2005, gross proceeds from these sales were $44 million compared to $2.7 million for the same period in '04. This increase in revenue and expenses shows up in our income statement as syndication and transaction fee revenues and commission expenses. We also allocate some SG&A expenses to this business.

As a result, we had a terrific quarter for investment banking, but on a year-to-date basis, we continue to run a little short of where we were in '04. Gross proceeds year-to-date for the nine-month period were $105.3 million compared to $134.9 million for '04. Again, this reminds us that the business is transactional in nature.

I've spent some time presenting our results and want to clarify what our real estate portfolio looks like or should look like by year-end, based on this asset sale activity. We started 2005 with 28 properties in our portfolio. Four were residential properties, two were industrial properties and the remaining 22 were office properties. We have since added six properties and have also sold or are scheduled to sell six properties, which would put us on pace to go back to 28 properties by the end of the year.

The six property acquisitions included four office properties from the merger that we completed at the end of April and two additional office properties we acquired directly. For the fixed asset sales, three were completed in the third quarter, two were completed earlier this month and the last property is scheduled to be sold in December. Three of the six sold properties were residential and three are office properties. We've classified income from all six properties operations as discontinued in our income statement and as of September 30, the three unsold properties were separately classified and the balance sheet is held for sale for both periods presented.

As a result, our portfolio should be 28 properties at the end of the year, consisting of one residential property, two industrial properties and 25 office properties. In the fourth quarter, we will report the last three sales, all of which are expected to be at gains. A supplemental schedule is attached to the earnings release that went out last night, which presents the real estate portfolio as of September 30, 2005 and slices and dices the portfolio for you by state and property type along with some other information about occupancy and lease maturity that we thought you might find helpful.

On the investment banking side of the business, during the third quarter of '05 we completed two investment banking transactions. One was for an office property in Dallas, Texas and the other was for development of an office property in Houston, Texas. Another investment banking transaction is planned for the fourth quarter.

Lastly, earlier this month, we declared a cash dividend of $0.31 per share, payable on November 21 to stockholders of record as of yesterday, October 31. The total amount of dividends declared during 2005 is now $1.24 per share. That concludes the financial highlights for the quarter and at this point, I'd like to introduce our CEO, George Carter, who will tell you more about Franklin Street and will discuss more fully our results and activities. Thank you. George?

Thanks, John. Good morning, everyone, and thank you very much for your interest in FSP. Bear with me. This is my first one of these, so I may not be smooth, but hopefully I'll be informative. Because this is our first earnings conference call, I'd like to start with just a quick profile or view of some of our company's core beliefs, philosophies and business model. I won't do this on later calls, but I will do it now. And then talk quickly about the third quarter, trying to add to what John said. And we'll open it up for questions after that.

At FSP, we take a very long-term view of real estate and its total return characteristics and competitiveness within the broader capital markets and other various competing asset classes. We, right now, are very intimately involved with 40 properties, 28 of which we own completely within FSP and 12 of which are outside in entities we call sponsored REITs that we have capitalized through our investment bank and manage directly or indirectly as asset managers.

These properties are in many different geographical locations, which is a part of our model. We're finding properties in the greater Boston area, around Washington, D.C. and northern Virginia and Maryland, Richmond, Virginia, Charlotte, North Carolina, Columbia and Greenville, South Carolina, Atlanta, Miami, Houston, Dallas, St. Louis, Indianapolis, Chicago, Southfield, Michigan and the greater Denver area and Colorado Springs and the Boulder area, San Diego, Silicon Valley and in the Seattle area.

We believe investment real estate is cyclical and commodity-like in its fundamentally supply and demand characteristics, but with the somewhat unique characteristics of location and replacement cost as long-term drivers, they have the potential to counteract real market value depreciation and, in fact, when combined with other factors, provide the opportunity for real market appreciation.

We have no permanent mortgage indebtedness on any of our 28 properties within the FSP portfolio. We believe our no-debt model allows us to get the best longer-term risk rewardadjusted returns on these real estate assets. These are returns the assets themselves produce, not financing spreads or financially engineered returns. And they are returns that are being earned without the risk of foreclosure, which no matter how small a risk you may believe that is, that risk does exist, even with large diversified portfolios when you have mortgage debt. We believe the no-debt model allows for better acquisition decisions, better property management decisions and better property disposition decisions.

When you are facing a regular mortgage payment, particularly in tough market cycles, sometimes property owners can do things for short-term necessity that can negatively impact longer-term returns. We invest in properties for two primary things. One, current rental income and two, long-term capital appreciation of the assets. All of our activities every day are aimed at these two objectives. Acquisitions, property management and dispositions are fully integrated in every way to accomplish, as best we can, these two objectives.

And we believe, as John just said, that our EPS - earnings per share numbers - and our CAD numbers are equally important in analyzing our performance. Both numbers are equally weighted by the company in determining the level of dividend distributions to be paid to shareholders. The company's EPS and/or CAD earned per quarter has historically been quite variable. But year-over-year, that volatility is very much reduced.

We also have a real estate investment banking division that operates as a TRS or taxable REIT subsidiary. Its purpose is to raise equity capital for our future growth through the acquisition and investor capitalization of specific properties, which we syndicate as single property sponsored REITs. Since the REIT structure requires the distribution of most of the company's earnings, access to various forms of outside capital becomes a must for significant new growth in a property portfolio owning organization. There is a cost to that capital, number one, and number two, that capital may not always be available, especially at the times you most want it.

Our investment banking group has been together for some time. We have a very unique source of capital that we access in single asset, private placement property REITs that have a different risk reward profile than the liquid traded FSP portfolio. We hope, as we acquire properties this way in our sponsored REITs that we can add value to them over time and over time, if that value was added, have the opportunity to merge those properties, those single asset REITs with and into FSP. One of FSP's main growth vehicles has been our investment bank and our access to new properties merged with and into FSP this way.

This business model and the core beliefs, philosophies and disciplines that FSP maintains has allowed us to increase dividends per share over the last seven years 55% - $0.20 per share per quarter in 1999 to the $0.31 per share per quarter today or $1.24 per share per year and to increase our share value over the same period of time from approximately $10 a share to the approximately $16 per share the stock closed at yesterday in the open market.

Our view of dividends is that they are very, very important. And while dividend levels are determined each quarter by the board of directors, I can tell you that we hold them sacred and believe they are a critical element of return, not to be raised or lowered lightly. We have never lowered our regular dividend in our company's history.

Our goal is to be able to raise dividends in up parts of the fundamental real estate operating cycle - that is to say when occupancies and rental rates are rising - and hold those dividends at the established levels during down parts of the fundamental real estate operating cycle, i.e. when occupancies and rental rates are falling. A look at our dividend history, our current EPS, CAD, cash flow statement that we - part of the Q and, mostly importantly, our balance sheet should give you a view as to the security of our dividend.

Thanks for bearing with me there. That's a quick view of the company and its philosophies and model. I can't add too much to what John Demeritt said about our third quarter performance, except that to tell you that, as a standard practice in our press releases, I - we will include a message from myself. These are not just sort of pro forma writings. I try to take a lot of time in writing this section of the press release to really inform investors and shareholders and prospective investors and shareholders really what happened during the quarter. I encourage you all each quarter to read this section as well, obviously, as the balance of the press release and the numbers.

Suffice it to say, for the third quarter, we, as John said, had improving net income, EPS and CAD levels for the quarter and maybe most important, I am and the management is very optimistic about the company's continued financial performance outlook for the balance of '05 and going into '06. The three principle drivers for the quarter were our rental operations in our 28 properties. Those properties have maintained about a 93% lease rate for the quarter, which is improving somewhat over the past few quarters.

And I think that the rental results - rental income results for the quarter is very encouraging in most markets that we find our properties. The improving U.S. economy and the corresponding increase in demand for office space in most of our markets is very encouraging and this is, finally, a legitimate and broad-based turn in what has been, over the last several years, a fairly dismal, fundamental office leasing market. We have concerns, as I'm sure you all do about the future of the economy and exactly what hurricanes and higher interest rates and higher energy costs might mean, but things being equal and the economy continuing to grow, we believe that we have, for the most part, turned the corner on the fundamentals in the office markets and that things will continue to get better from here.

Our second biggest driver, as John mentioned also, was property sales. It is one of the main reasons we are in this business is to try to create value in our properties and realize that value at some point in the future. What's important to understand about FSP, however, is that selling properties generates huge sums of cash that need to be reinvested to maintain an increase in our enterprise's value. We do not have permanent mortgage debt, so there is no debt to be paid down when you sell a property. And we have significant cash on the balance sheet and significant amounts of that cash allocated to reserve requirements that we believe our properties need for TI, leasing commissions, et cetera.

So, when we look to consider a property sale, we first look to see where we can reinvest those proceeds. And we were very fortunate this year to have acquired two wonderful properties in Denver and Indianapolis which our property sales have fully funded. We now own those two properties in Denver and Indianapolis all cash as we do other properties in our portfolio. Most important for us, too, is our recent board vote on October 28 that approved a share repurchase program. And now our shares are added as another arrow in our quiver for cash proceeds from property sales and excess cash on the balance sheet. And we do plan to take advantage of our share repurchase program. We think our stock is a great value in today's market as well as other properties that we may find.

The third driver is the investment bank and, as John said, we had a better quarter in investment banking. We had total investor funds closed in of about $44 million. We finished up a Dallas office building that was our largest private placement ever - $86 million. And we did our first development transaction ever - a $27 million fundraise to develop an office building.

We have a number of properties in our portfolio that have excess land that is very developable that is attached to these properties. And when we target markets for continued acquisition because we like the long-term dynamics of a particular market, we now are looking more and more at land that we may own in those markets as a possibility for development if, in our opinion, that development property can produce potentially greater returns than finding other acquisitions in those desired markets.

I would say, as John did, that when you look at our company, you need to understand that our investment bank is vital. It's important. It has produced wonderful growth for our company in terms of accessing property, accessing capital and accessing that capital at a profit which is paid back to the FSP shareholders. But it is a transactional business. Historically, our investment bank equity sourcing capability tends to be somewhat countercyclical, so that in markets such as we've had over the last couple of years, where real estate prices are rising significantly, we tend to be slower in that bank's activity. And consequently, when prices are falling and maybe there is more opportunity available on a pricing basis, that bank tends to get more active. We do have a, as John mentioned, a private placement planned for the fourth quarter of this year.

With that, I will ask the operator now to open the conference call for questions.

Thank you. (Operator instructions) Your first question comes from the line of Tom Hackett with Hackett Investment Advisors. You may proceed.

Good morning, gentlemen. Thank you for the update.

Good morning, Tom.

I assume that the decision not to move in the five full sponsored REITs would be that it would disadvantage the existing shareholders of FSP to the advantage of the partners in those five other programs. Is there a level of the stock that the earnings on those five properties would equate overall with the level of the earnings in the fund itself?

You're basically correct in your assumptions. It fundamentally is hard for us to craft a transaction that makes sense for both sides of this equation. We have a fiduciary responsibility to both sides, the FSP shareholders - the public shareholders - as well as these private shareholders in the five targets. I do not feel comfortable giving you a certain price of stock only because that is a legitimate negotiation between both sides. But clearly, it is the current price of our FSP stock which makes that transaction really hard to do. I think from time to time in the natural course of markets and stock pricing, there are times that our stock price will be more favorable and times that it will not be, relative to mergers. Certainly, now is a time that it is not as favorable.

Have you begun any of the 35 million share repurchase?

We are in - currently in a blackout period and that blackout period will end shortly. And when it does, we would anticipate taking advantage, at our discretion, of that repurchase program.

Thanks very much.

(Operator instructions)

Any other questions from any party?

At this time, sir, there are no questions in the queue. I would now like to turn it over to Mr. George Carter, Chief Executive Officer, for closing remarks.

Well, thank you very much for tuning into the call and listening and/or participating. This is our company's first earnings conference call. It won't be our last. I know some of you will be at the NAREIT Conference later this week in Chicago and I look forward to seeing you there. Thank you very much.

Ladies and gentlemen, this does conclude your presentation. At this time, you may all disconnect and have a wonderful day.