Franklin Street Properties Corp (FSP) 2005 Q4 法說會逐字稿

Good morning, everyone, and thank you for participating in this call. With me this morning are 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 Aaffect Future Results section in our recent report on Form 10Q for the quarter ended September 30, 2005, which is on file with the SEC.

In addition, these forward looking statements represent the Company's expectations only as of today, February 22, 2006. 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 adjusted funds from operations or AFFO. A reconciliation of AFFO to GAAP net income is contained in yesterday's press release, which is available on the Investor Relations section of our website at www.franklinstreetproperties.com. I will now turn the call over to John Demeritt, our Chief Financial Officer.

Thanks, Scott. Welcome to our earnings call. We're very happy to talk with you about our fourth quarter and year end. What I plan to cover is first, to go over the performance measures that we consider to be important; second, to present our results for the quarter and year end; and I'll highlight the three most significant changes comparing 2005 to 2004; and then I'll update you for our fourth quarter and annual asset sale activities in our most recent press release about dividends.

Afterwards, George Carter, our CEO will talk with you about FSP and discuss more fully our results and activities.

We evaluate our performance based on net income or EPS and cash or funds that we generate from operations, and believe each is an important measure. Net income is the measure that follows Generally Accepted Accounting Principles or GAAP, and GAAP reporting includes gains or losses on sales of real estate, which we think a REIT should be measured by.

We also consider Adjusted Funds From Operations or AFFO an important measure. We previously called AFFO, Cash Available for Distribution, or CAD, and our calculation is the same. But we believe AFFO is a more broadly used term throughout the REIT industry and is generally calculated very similarly to how we define it.

AFFO is a measure of cash from operations of our company and is essentially net income excluding gains and losses from asset sales, and adds back or excludes depreciation, amortization and some non-cash items. There's a detailed definition in our press release as Scott mentioned, and also in our 10K that we expect to file in the next week or so. I encourage you to read them.

We do reconcile net income to AFFO in the earnings release in the segment footnote of our financials, if you're interested in getting into more detail with it. We consider both EPS and AFFO in determining the amount and composition of distributions that we pay to shareholders.

Our EPS for the quarter was $.47 per share compared to $.28 per share in 2004, which is a substantial increase of $.19 cents per share over last year. Net income was $28.4 million for the fourth quarter of '05, compared to $13.9 million for 2004. One thing to keep in mind when comparing '05 and '04 is that we issued 10.9 million shares at the end of April to complete a merger; so, the dollar increases are greater than the per share increases because they're based on weighted average shares for the periods that are presented.

I should point out that in November and December, we purchased 731 shares of our stock, but the impact of that on weighted average shares was insignificant. Our AFFO for the quarter was $.28 per share, compared to $.35 per share in '04, which is a $.07 decrease; and that takes into account the change in our weighted shares. On a dollar basis, AFFO is much closer in comparison. The fourth quarter 2005 AFFO was 16.9 million compared to 17.2 million, so it was much closer.

Our net income and EPS for the year were the highest in FSP history. EPS was $1.32 per share compared to $0.96 per share in '04, or a $0.36 increase over last year. And, on a dollar basis, net income was $75.1 million for 2005 compared to $47.8 million in 2004. Our AFFO for 2005 decreased $0.07 per share and was $1.14 compared to $1.21 in 2004; and, on a dollar basis the decrease was about $4.8 million for the year.

The three most significant factors that affected EPS and AFFO were first, at the end of April, we merged four properties into our portfolio, which increased net operating income for part of our second quarter as well as the remainder of 2005, or rather, for eight of the 12 months. 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 which we purchased at the beginning of the third.

The purchase price of these properties was financed with asset sales of properties in the portfolio. The timing of these transactions was such that we initially bought these properties and earned the spread between the yield on the assets and our cost on the line of credit. We then decided to retain these properties for our portfolio. The proceeds we received from asset sales that were completed in the third and fourth quarter were used to repay our line of credit and increase our cash on hand. As of year end, we have no balance on our line of credit, and our cash balance sits at $70 million.

The second highlight is the gains on assets sold for the quarter and the year. In 2005, they were $17.2 million and $30.5 million respectively. Sales in the fourth quarter included two residential properties in Texas that were completed in October and the sale of one commercial property in California that we completed in December. Net gains in EPS for these transactions were $0.28 per share for the quarter. Through the nine months, we have recorded net gains from three other dispositions totaling $13.3 million. So for the year, gains on asset sales ended up at $30.5 million, or $0.54 per share. In 2004, we had no asset sales. So, these gains had a big impact on our EPS calculations, but are excluded from AFFO.

Third, the impact of our investment banking results for the fourth quarter in the year different. The nature of our investment banking is transactional, and our investment banking revenue is based on gross picked proceeds from the sale securities in the entities that we sponsored. For the fourth quarter of 2005, gross proceeds on these sales were $33.5 million, compared to $73.3 during the same period in '04, or there was a decrease of about $39.8 million.

For the year, we have $138.8 million in gross proceeds, compared to $208.2 million in 2004, or a decrease of about $69,4 million. Our revenues and expenses arising from this business showed up in our income statement as syndication and transaction fee revenue and commission expenses. We also allocate some SG&A expenses to this. These results comparing '05 to '04 remind us of how transactional the nature of this business is.

I spent some time presenting our results and want to clarify what our real estate portfolio looks like at year end. We started 2005 with twenty-eight properties in our portfolio. Four were residential, two were industrial, and the remaining twenty-two were office properties. We've since added six properties, and we've sold six properties, which means we currently have twenty-eight properties still in the portfolio.

During the fourth quarter, we designated one of these properties for sale, which we expect to sell in 2006. So, our continuing portfolio of real estate will be twenty-seven properties as of the end of the year.

The six property acquisitions in 2005 included four office properties from the merger completed at the end of April and the two additional office properties we acquired directly, which I mentioned earlier. The six asset sales, three were completed in the third quarter, and three were completed in the fourth quarter. Three of the sold properties were residential, and three were office properties. The asset held-for-sale is in office property.

We've classified income from all seven of these as "discontinued", and as of December 31, they were separately classified on the balance sheet as held-for-sale for both periods presented. As a result of this activity, our continuing portfolio is twenty-seven properties, consisting of one residential property, two industrial properties, and twenty-four office properties. We expect the asset held-for-sale in 2006 to be sold at a gain.

Now, listening to myself go through these property accounts, I kind of feel like I'm singing a partridge in a pear tree to you. But, to be more clear, we do include a supplementary schedule in the release. The schedule presents our continuing '06 real estate portfolio as of 12/31/05, and slices-and-dices the portfolio by state and property types, along with some other information about occupancy and lease maturity which we thought you might find helpful.

On the investment banking side of the business during the fourth quarter of '05, we completed one investment banking transaction for an office property in Houston, Texas. Another investment banking transaction is planned for first quarter of 2006.

Lastly, in January, we declared a cash dividend of $.31 that was paid yesterday to stockholders of record on January 31, 2006. The total amount of dividends that was declared during 2005 was $1.24 per share. I do want to correct one thing I said earlier on the stock repurchase plan. We bought back 731,000 shares, not 731 shares. I've just been reminded that I might have used the wrong number.

That concludes the financial highlights. And at this point, our CEO, George Carter, will tell you more about us and discuss more fully our results and activities. Thank you for listening.

Good morning, everyone. Thank you, John. John has summarized the fourth quarter and full year numbers, and as with all of our earnings releases, there is a written message from me in which I try to give my view of the quarter and/or full year activity of the Company. I encourage you to read this section of the earnings release every quarter, as it will do a much better job of summarizing our Company's activities in print much better than I can do verbally on a call like this.

For this morning's call, I thought I would just talk about a few key areas of our business that will likely have a meaningful impact on 2006 results. Internally, we refer to these areas as flex points. Flex point number one revolves around our real estate investment banking business. It's lower activity in 2005 was one of the principal factors negatively affecting our AFFO. In 2005, sales were about $139 million, down about 33% from $208 million in 2004, and down about 40% from 2003 levels.

The big problem with our investment banking business continues to be acquisitions that fit our investment criteria and our ability to purchase them at what we consider to be the correct price. For those of you that have been involved in commercial real estate over the last couple of years, you know that the flood of money that has come into the market has pushed down cap rates, pushed up prices per square foot, and it has just made competition to find quality investments harder and harder. There are two views, sort of ends of the spectrum, on what's been going on the last couple of years in real estate. One is, sort of, the historical cyclical view that this is just a cycle and will end in more normal cap rates, and prices will come back soon. The other end of the spectrum is that this is, sort of, a new paradigm.

At FSP, we don't really hold any of those dramatic views at either end of the spectrum. I guess if you pushed me, I would say we are a little bit more towards the historical cyclical viewpoint, rather than the new paradigm. But what we try to do is we try to buy value in all of the markets we're interested in, all of the time. It's just that in the last few years, with all the money flooding into the game, the ability to buy quality properties at a price that we are comfortable with has just become harder and harder.

Our investment bank's reputation in the marketplace is excellent. We've effectively been doing this business for 13 years. Our performance has been excellent, and we will never compromise that performance just for the sake of doing a near term deal. The long term growth and value of our investment bank is unquestioned, and we will only purchase those transactions which makes sense in our mind from a present value and IR point of view.

The good news, as John mentioned, is that we at the start of '06 here, in the first half, have more acquisitions on the plate than we have had in the last couple of years. So we are looking at least in the first half at our bank doing much better. However, the pricing in the broader commercial real estate markets has not changed much in the last year. It is as tough as ever.

The second big flex point that we will look at this year is our portfolio of twenty-seven properties, as John mentioned. In our portfolio, we take in sort of an A part and a B part. The A part is rental operations, and the B part is property sales. They are equally important to FSP. And everything we do, everyday, from the acquisition of a property to its ongoing operation, management, the leases we sign, to its ultimate disposition is in an effort to maximize long term rental cash flow from that property, as well as maximize its potential for appreciation, and achieving that appreciation as a gain on sale.

On the rental operations portion of our portfolio, we have about 17% of our commercial office leases that are rolling this year. And how we do here on vacancy periods and rental rates is going to be important to our performance in '06. We feel like we're off to a very good start in that arena. The rollover in leases in '06 is offset somewhat by other properties that are leasing already vacant space, and leases in those properties that have programmed rent increases that obviously have no tenant rollover.

The real good news for rental operations though I think affects most office REIT's out there, and that is that we are seeing a broad recovery in virtually all of our office markets. Occupancy is improving. Rental rates are improving. And this is really broad based now, not just in a few markets. And it's been tough the last two or three years for most office REIT's. It's getting better and it's getting better broadly now. It's almost fun again.

The second side of our property portfolio is property sales. How we do here relative to gains and losses will have a big effect on our earnings and on our ability to replace those sales with creative, new investment properties. And here I really want to make sure that all of the investing public understands FSP in this area. And that is to say that when we listed our stock, we committed to the enterprise value of this Company, that is the value of its stock. And we do not sell properties unless we believe that we can reinvest those proceeds into a property which will do better over a period of time. And we really look to try to be accretive right away, as well as long term with our reinvestment of those proceeds.

We have, relatively speaking, a lot of cash on the balance sheet. We have no permanent debt. And therefore, selling a property simply generates more cash. And if we cannot put that cash to work at a better rate than the property we're selling, we simply aren't interested in selling. We did a real good job in '05 in that area. We had bought two very large properties ahead of most of our property sales. They were very accretive from the properties we sold to the properties we purchased, and we're very excited about the long term future of those properties.

We are always trying to upgrade our portfolio properties, and we have identified properties for 2006 that we may want to sell, some for property specific reasons, and some for market reasons. And interestingly, the very real estate pricing markets that cause us trouble in buying properties for syndication by our investment bank make very attractive some of the potential sale prices on certain of our own portfolio properties. And there does seem to be somewhat of a natural, sort of cyclical counterbalance between the two businesses of investment banking acquisitions and our property portfolio sales.

The third flex point, and this is quite a broad one, is property acquisitions. I mentioned a few of them already. We acquire properties in a number of ways. One way is by directly purchasing the property into the Company, in effect, using the cash from our own balance sheet. We have quite a bit of cash on that balance sheet right now, more certainly than we need for our funded reserves. And we do have a property that we have in our sites, and we hope to close sometime in the first quarter. That will take some of that cash. We are real excited about that investment.

We buy directly into the Company by reinvesting proceeds from property sales, as I've mentioned just previously, and we try to make these reinvestments accretive, and we focus on the enterprise value of the Company and the value of the stock. If we have very large gains from properties that we are selling, we will try to use 1031 exchange mechanisms where possible to keep all of those proceeds in the Company and available for reinvestment.

Third, the area of property acquisitions for syndication by our investment bank. These kinds of properties usually have a different slant to them. They are far more value added- plays. We actually did our first pure development transaction in '05. And this property profile is somewhat different than the properties that we buy directly into FSP. We are attempting in our syndication business to create significantly higher near term value with obviously a different risk v. reward characteristic associated with that.

And lastly, we have acquired properties and anticipate continuing acquiring properties through mergers, and specifically, mergers of our sponsored REIT's that we've done in the past. We would anticipate continuing to look at that in the future. These sponsored REIT's are originally syndicated by our investment bank, and we are always looking at potential acquisitions via our sponsored REIT's and others.

And in the past, we've done several of these types of acquisitions by exchanges of stock rather than cash. We obviously, as managers of our sponsored REIT's and their properties, have an excellent view of when and if those properties achieve certain of their near term objectives, and consequently may become an interesting fit with FSP.

Many of the shareholders of our sponsored REIT's are tax paying individuals and/or entities; and, in the past, mergers for stock consideration have been tax free, which is a significant benefit for many of those sponsored REIT's shareholders.

In the early months after our listing in June of '05 on the AMEX, the FSP stock price was somewhat volatile. However, since late fall, we believe that the stock price has stabilized, and when and if a definitive agreement regarding a potential merger is reached, FPS will make a public announcement via an 8-K filing on the matter.

These flex points will have an affect on FSP's 2006 financial performance, but it is important to keep them in perspective against the dominant impact that our day-to-day business operations have. The base of our real estate business and resulting value for shareholders involves the proficient execution of hundreds of day-to-day tasks by all of our employees, basic blocking, and tackling done well everyday. We work hard at that and we are focused and well position to affect the flex points.

I am very optimistic about the Company's financial performance outlook for 2006 and beyond. The two fundamental reasons, and they are as fundamental as it gets, is that, broadly speaking, the office markets are improving. The markets that we are in are improving. Secondly, our Company is in wonderful financial position to take advantage of increasing opportunities that we see coming in the marketplace and that we are exposed to.

The marketplace is very dynamic. There is a lot of uncertainty about interest rates in the future, and in our all-cash position. And in our liquid position, we think we are in a great position to take advantage of opportunities that are coming at us everyday.

I would now like to open it up for questions.

[Operator Instructions] Your first question comes from the line of Eric Anderson with Hartford Financial. Please proceed.

Good morning, gentlemen. I have a quick question. I'm trying to really understand the numbers a little closer. The $33.5 million that you reference as the investment banking revenues in the quarter, does that number get into the top line, or is it only what you net out of that in terms of your fees?

The $33.5 million is the proceeds that we received for selling an interest in the REIT's that we sponsor. They don't show up on our income statement. We get a percentage of those proceeds that show up as syndication fees or transaction fees on our P&L.

Okay. So it's basically just sort of the net after all of your expenses that makes it way into just the revenue line for syndication?

Exactly.

And just a sort of related question to that, sort of picking up, George, what you were talking about, is it fair to say that the drought of finding attractive properties to run through the investment bank in terms of the syndication business does not in any way force you to sell properties on the other end to, in essence, try to compensate for a lack of syndication revenues? Is that where you are trying to make the point?

The two, Eric, really have nothing to do with each other. The sale of properties and our motivation to do that really has nothing to do with the investment banking business. It's just that acquisition of the kinds of properties that we are interested in syndicating for the investment bank are usually tougher than the acquisition of properties that we want to acquire to replace property sales out of the portfolio; and that is because the property's near term potential, which is what we're looking at for our investment banking business, those kinds of properties are just fewer and far between.

In addition, when we're selling properties out of the portfolio in this market, we are selling properties at very low cap rates, very high prices per square foot from an historical perspective. And it is much easier to be accretive on the acquisition front there.

Okay. Good. That helps put things in perspective.

[Operator Instructions] Your next question comes from the line of Todd Craig, with Brian, Hart and Mahoney. Please proceed.

I have a question on the last one, George, that you were making with potential mergers with existing private SSP properties. I'm not sure I totally grasped what you were saying there, and I guess specifically, would you be willing to bring properties out of the private REIT's only if they're accretive to the public entity. Or if you could expand more on your thoughts there that would be helpful.

We try on all of our acquisitions, whether they're acquisitions via merger from our sponsored REIT's, or whether they are direct acquisitions off the balance sheet, or whether they're reinvestment acquisitions from the sale of portfolio properties, we try to have all of our new properties, in whatever form we acquire them in, to be accretive, and we try to have them be accretive immediately. But in addition and more importantly, really viewing them as longer term investments that will outperform wherever our cash is or whatever properties that we are selling to reinvest into them.

The difference in type of property though and the relative risk and reward characteristics of properties that we acquire, do have a different vent when we are acquiring for syndication than when we are acquiring directly into the Company. And this has evolved over the years. But most of the properties now we're trying to acquire for syndication are valued-added plays where, for example, there may not be near term accretive cash flow because we're trying to add value to that kind of property. If we can add value to it and achieve our objectives, then those properties will cash flow of a consequence that very well could be attractive to FSP for acquisition purposes.

For example, we did a pure development transaction as a syndication in the fourth quarter -- or in the third quarter -- and in that transaction we are literally developing the properties; so there will be no cash flow for almost a year. That would not be the kind of acquisition that we would be interested in purchasing directly into FSP until, when and if, that property is basically fully leased and cash flowing and accretive to FSP on an acquisition basis.

So, the difference in property type, its relative risk and reward and its near term potential is a big differentiating factor for what we buy directly into the Company and what we syndicate. But whatever we bring into the Company, whether it's direct or through a merger or through some other mechanism, we are not prone to buying properties that aren't accretive both immediately and, what we believe to be, over the long haul.

That's helpful. As a follow-up, could you also expand a bit on what your current thoughts are on the stock repurchase?

We can only really say what the stock repurchase program is. John gave you the numbers, I believe it's 731,000 shares, John, that we have purchased. We are very happy to have the stock repurchase program in place because it does give us, in the right circumstances, an option for cash that we either have on our balance sheet and/or generate from property sales if a property acquisition is not available, that makes as much sense as the stock might at that point and time. So it's really another sort of arrow in our quiver for investment purposes.

Thank you.

Your next question comes from the line of Bill Bradford, with Garrison Bradford. Please proceed.

Good morning. To go back to the prior question, how many of these special purpose entities are there actually? And can you give us some sort of a profile of how many are mature to the point where they might be attractive acquisition candidates, and others at the other end of the spectrum where the value has not yet been added? And, then just related it to that, does the fact that cap rates are so low now mean that it's going to be difficult to come to a pricing agreement, which I assume is at an arm's length, on an arm's length basis, to actually affect an acquisition?

Bill, we have really built the Company property by property through, as we call them, single asset sponsored REIT's, where these individual REIT's that have their own shareholders own, in most cases, simply one property. It's a one property REIT. And there's a certain objective that we're trying to achieve with that property, in that special sponsored REIT. And if those objectives become achieved unsatisfactorily, then obviously, we look at those for potential merger. And we have really built the Company that way.

Right now we have, outside of Franklin Street, in these single asset REIT's, thirteen sponsored REIT's, and we are preparing syndication right now of our fourteenth. The total market value of these REIT's is not -- I don't have it on the tip of my tongue, but you're talking another half a billion dollars probably sitting out in single asset sponsored REIT's that are all trying to achieve certain objectives on their own. It would be inappropriate because of all of the things involved in arm's length transactions between sponsored REIT's in FSP to comment on which ones may have achieved their objectives or be right on. But again, when an agreement is reached, we will file an 8-K, immediately.

But we have built the Company this way. It is - in our opinion - a great way to continue to build the Company. It imposes a wonderful discipline. We buy these properties one at a time. We buy them first in the syndicating REIT. They have to stand up to investor scrutiny for shareholders to invest their money in them. They operate under their own mantle and their own objectives, and there are different objectives for different types of properties. We, obviously, are very close to them in that we manage them and know when they are, in fact, achieving their objectives or about to achieve their objectives and, again, constantly look at them.

Thank you.

And there are no further questions at this time. I would now like to turn the call over to Mr. George Carter. Please proceed, sir.

I just want to thank everyone. Again, this was our second earnings call. Thank you for taking the time out of your day to participate in this call. And I hope to see some of you at the New York Society of Security Analysts 2006 REIT Industry Conference, of which FSP will be a participant, in New York, March 30. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.