Franklin Street Properties Corp (FSP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Franklin Street Properties Fourth Quarter 2006 Earnings Conference Call. My name is Oneka, and I'll be the operator for today.

[OPERATOR INSTRUCTIONS]

As a reminder this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Scott Carter, Senior Vice President and In-house Counsel. Please proceed, sir.

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 Item 1A risk factors of our quarterly report on Form 10-Q for the quarter ended September 30, 2006, which is on file with the SEC. In addition, these forward-looking statements represent the Company's expectations only as of today, February 21, 2007. 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 in the investor relations' section of our web site at www.franklinstreetproperties.com.

Now, I will turn the call over to John Demeritt, our Chief Financial Officer.

Thank you, Scott. Welcome to our earnings call. We are very happy to talk with you about our fourth quarter and year-end results. What I plan to cover today is some of the high points of the fourth quarter of 2006 compared to 2005. And we'll be referring to the earnings release that we sent out yesterday. Afterward George Carter, our CEO, would like to discuss with you our view of FSP and more fully the 2006 results.

We evaluate our performance based on both EPS, AFFO, and AFFO plus gain on sale of real estate. We believe that each is an important measure, and consider them when determining the amount and composition of distribution that we pay to shareholders. We generally prefer to look at our performance over the long-term, though it's important to look at the quarter as well.

Referring back to the earnings release for the fourth quarter of '06 compared to '05, on a dollar basis we increased net income for the quarter 39% to $39.5 million. AFFO increased 20% to $20.3 million. And our AFFO plus gain on sale of real estate increased 38% to $47.3 million. On a per share basis, the results were an increase to EPS of 18% or $0.56 per share. And the AFFO increased $0.01 over fourth quarter of '05. Our AFFO plus GOS metric increased 18% to $0.67 per share.

There were two main drivers for our fourth quarter results in '06 compared to '05, both of which reflect the transactional nature of our business. First is the gain on asset sales, which was the most significant component. We had a $27 million gain on sale of real estate in the fourth quarter of '06 from the sale of two properties that we did. And included in there as well is a provision for a property that we sold on January 31 of this year at a loss. This compared to the fourth quarter of '05 when we sold 3 properties, all at gains, totaling $17.2 million.

The other significant pickup for the quarter was in our investment-banking segment, which like GOS is also transactional. Our investment banking business is based on gross proceeds achieved from the sale of securities. Proceeds increased $36.5 million to $70 million for the fourth quarter of '06 compared to '05, which is more than double what we did in the fourth quarter last year. Those are the key points for the quarter, and there will be plenty of time for questions afterward.

At this point, our CEO, George Carter, would like to tell you more about us and 2006. Thanks for listening. George?

Thank you, John. And thank you to all of you who have taken the time out of your day to listen to this earnings call. John has reported fourth quarter '06 numbers. And as I have said on every earnings call since our public listing in mid 2005, our quarterly earnings can be quite variable because of the transactional components of our business. And consequently, we internally pay much more attention to our annual financial results rather than to any particular quarter, especially when trying to analyze performance or trend metrics.

Since 2006 was our first full year as a publicly traded company, I thought I would try to relate to you, in this call, some of the ways that FSP management looks at its annual financial results. After that I will try to give a view of FSP business in 2007 and how the different components of our business mix appear to us at the start of the new year. You will find some of what I'm going to talk about on the first few pages of our earnings press release under my headline commentary. It may be helpful for those that have a copy of the earnings release to follow it as part of this discussion.

FSP is a real estate investment company that has three major components to its profitability. One is rental income from properties, two, gains or losses on sales of properties, and three, fee income from real estate investment banking activities. As a reminder, FSP did not begin life with an existing portfolio of properties. Consequently, we did not start with any owners of property that carried low or negative tax basis. And consequently, we have no up REIT structure or OP units. We have no preferreds of any kind and no permanent debt.

Common stock owns 100% of every dollar of revenue generated from every source of FSP business. Starting with no properties 15 years ago, FSP and its predecessor effectively built the Company one property at a time. Every acquisition, every lease decision, every capital improvement project, every repositioning or pure development effort is undertaken with two principal financial return objectives. One is rental income and the other is long-term capital appreciation.

We value both equally. And we try to manage each property to generate the best overall rate of return with both of those objectives. Many times we trade on a short-term basis, one side or the other, for that best overall rate of return. With that as a structural investment backdrop, following are some of the full-year 2006 financial performance metrics that we think are meaningful when looking at Franklin Street Properties.

And all of the numbers I'm going to give you here are in fully diluted share amounts unless otherwise noted. And these again, are on the earnings statement under my commentary section. The first metric that we always look at is what we sort of call internally intrinsic return. And that is an intrinsic return that's outside the stocks, price performance, and the marketplace. The two key numbers that go into that return are dividends and shareholder equity per share.

In 2005, we increased our shareholder equity per share by $0.92 a share and paid $1.24 dividend. Therefore this intrinsic return number that we look at totaled $2.16 a share in '05. In 2006, we increased shareholder equity per share $1.97 per share. And paid $1.24 dividend so that in 2006 this return number was $3.21 a share. We take a look at that number as a percentage of our closing year share price. In '06, our closing price was $21.05 per share, and so $3.21 is about 15.3% of that closing share price.

We also look at what percentage the dividend is of intrinsic return. And our $1.24 dividend expressed as a percentage of the $3.21 is about a 39% dividend. Moving on to some other metrics that are a little more -- probably familiar. Earnings per share, which is done under traditional GAAP accounting, we believe is a good and valid measure of our performance as it includes all three of our business components and of course includes depreciation.

Depreciation does not have as big an impact on FSP as some other REITs because of our no debt model. In 2005 our earnings per share were $1.32. In '06 that rose to $1.65, a 25% year-over-year increase. And the multiple of that $1.65 on our closing stock price is about a 12.8 multiple. Our dividend payout as a percentage of our $1.65 earnings per share is about 75%. And we are able to do that kind of payout for a number of reasons.

But not the least of which is, we do avail ourselves of 1031 exchange mechanisms, which allow us to keep more profits in the company for reinvestment. The good news is that we have reinvested virtually all of our sale proceeds or have them earmarked for reinvestment at this point into new properties. The next metric, which you've seen before from us, is AFFO or adjusted funds from operations.

AFFO is a division or componentization of our real estate investment efforts in that it measures only one-half of our real estate investment objectives. And that's the rental income objective. It excludes the other half of our objective that is capital appreciation. It also adds back the depreciation expense that's part of EPS, as well as recognizing our investment banking activities. AFFO in 2005 was $1.14 a share that rose in '06 to $1.19 per share or 4.4% year-over-year increase.

The second half of that, of the real estate return equation is GOS gain on sale. And like AFFO it is a division of componentization of our real estate investment efforts, in that it measures only one-half of our real estate investment objectives, capital appreciation or capital loss as the case can be. It excludes the other half of our real estate investment objective, i.e., rental income. It also excludes investment-banking business.

In 2005, our gain on sale per share was about $0.54 that rose in '06 to about $0.91, about a 68.5% year-over-year increase. The next metric as you might imagine is the combination of our two real estate investment objectives that AFFO plus GOS. That's adjusted funds from operation plus gain on sale. This is a non-GAAP accounting measure. But like EPS, or earnings per share, we believe it is a very good and valid measurement of our performance as it includes, like EPS, all three of our business components.

The biggest difference between this metric and EPS is that AFFO plus GOS adds back the non-cash expense of depreciation. This number was $1.68 per share in '05. It rose to $2.11 a share in '06, a 25.6% year-over-year increase. We trade, our closing price traded at about a 10 multiple of AFFO plus GOS. And dividend payout expressed as a percentage of this number is about 59%.

The last sort of metric you'll see on our earnings release is something we call AFFO plus appreciation realized on assets sold. And really this is just a cross check, sort of an internal cross check, on how much of the gain on sale is depreciation recapture over the sold property's original, actual acquisition cost. Again, depreciation impact for FSP is not as significant as in many other real estate companies because of our no debt model.

Usually, we find this number falling between our EPS number and our AFFO plus GOS number, as is the case in both 2006 and 2005. In '05 this number was $1.42 a share, rising in '06 to $1.87 per share, or 31.7% year-over-year increase. Just as an important sidebar at this point, I'd like to tell everyone that GAAP accounting works well for FSP. It tracks and accounts for depreciation throughout the property investment process. Ultimately truing up on a property sale.

It really deals with what you invested when you bought the property and what you actually got back when you sold the property. The problem with GAAP accounting in real estate for the liquid markets is that it takes time to true up this depreciation expense and other things between the time you buy a property and the time you sell it. And the liquid markets want to, in effect, try to price everyday.

They've come up with a number of ways to do this. One of the most popular is something called NAV, net asset value calculations, which purport to value sort of the portfolio instantly using a cap rate of NOI, or net operating income. We think that NAV calculations are fine for some firms. But for other firms in other types of properties, NAV calculations have the potential to be wildly inaccurate, particularly for Franklin Street Properties portfolio of properties because we are so diverse around the country and have such different objectives per property.

And our business model, we believe that NAV is as generally calculated today by many is not as accurate or meaningful as simply following shareholder equity per share values over time, as reported under GAAP accounting. After we look at the growth in these various metrics, we always of course check the balance sheet to make sure we are not compromising the balance sheet to achieve earnings growth.

Three, we look at a lot of metrics on the balance sheet, but three important ones are shareholder equity per share. And you can see if you look at the earnings release that in '05 our shareholder equity per share was $11.06 per share. It rose in '06 again after paying $1.24 in dividend to $13.03 a share, or 17.8% year-over-year increase. Our closing year-end stock price would be at about 1.6 times shareholder equity per share or 1.6 times book, if you want to use that term.

If you want to stay a no debt REIT or no debt real estate company, you have to fund your real estate TI's, leasing commissions, CapEx, et cetera. So cash on the balance sheet is important for us as we try to gauge what our properties will need and what investments we want to make in the future. So we do look at cash on the balance sheet. And '05 cash on the balance sheet was about $69.7 million, that rose in '06 to about $75.1 million or about a 7.7% increase.

And as throughout our history FSP at the end of '06 had no permanent debt. Finally, if one full year analysis is more meaningful then one-quarter analysis, which we believe it is, then two full years is better than one full year. And one of the things we did at the end of this year is stand back and look at our first two years as a publicly listed company. And we really just did a business one-on-one look. What's the top line? What's the bottom line? How's the balance sheet?

Just looking at income statements, balance sheets, cash flow statements from our Qs and Ks and earnings releases. And here are the numbers. Starting on the top line of total revenues. At the end of 2004 we had about $69.4 million in total revenues that rose in '05 to $78.1 million in revenues and in '06 to $114.3 million in revenues, about a 64.6% two-year growth rate in top line revenues.

On earnings per share, i.e. the bottom line, at the end of '04 we had earnings per share of $0.96, that rose in '05 to $1.32 per share. And in '06 to $1.65 per share or about a 71.9% increase in our two-year growth on earnings per share. Going down on the balance sheet looking at equity per share, at the end of '04 we had equity per share of about $10.14, that rose in '05 to $11.06 per share, and in '06 to $13.03 per share, about a 20.5% increase in equity per share. And of course that is after paying out the $1.24 in dividend each of those years.

Cash on the balance sheet, again, which is important for us because of our no debt model and wanting to maintain that, at the end of '04 cash on the balance sheet was about $52.7 million, rising to $69.7 million at the end of '05, and then to $75.1 million at the end of '06 up 42.4%. Just to recap our two years since being public, top line revenues grew about 64%. Bottom line earnings per share grew about 72%.

Equity per share grew about 28.5%, and cash on the balance sheet grew about 42%. And we did this with an unleveraged balance sheet, which tells us that our returns are coming from our real estate and our business, and that spreads off of debtor mortgage rates. Those are some numbers and I know that was long-winded. I promise I won't do it again. But this was again the first full year of our listing, and I thought it was important. And I hope helpful to you, to just take a look at these numbers the way we look at them internally.

Looking forward into 2007, and trying to view our three major business components. We are very, very optimistic for another good year. Our business component of rental income looks generally good, as virtually all of our markets that our properties are in continue to improve in both occupancy and rental rates. We have only about 10.2% of our leases expiring in 2007.

We do have two properties, one in the Seattle area and one in the Silicon Valley area, that were single tenant properties that had always planned to multi-tenant when those leases expired. We are doing that multi-tenant work, which is really a repositioning of those properties right now. We're excited about them because both of those markets, we think, are timed very well for our repositioning effort. And we believe that once we position we will certainly make a lot more in total return than rent lost in the next six months.

A piece of really good news is, if you've been watching us for the last two years you've seen us buy a number of large properties with the sale proceeds from properties that we've sold. These properties are generally larger than the ones we've sold, newer properties. And when we sell a property we hope that we are reinvesting those proceeds in a property that will do better over the next five to ten years than the property we sold.

The new properties that we have purchased over the last couple of years are really hitting their stride, and exceeding our pro forma that we had put on those properties when we purchased them. So we're very excited about those. Our second business component is gains or losses on the sale of property. We have our eye on a number of potential sale and acquisition properties. We are not interested in selling a property unless we believe we have a good acquisition opportunity.

And in many of our larger cyclical markets, we have, they have, in effect been cycling back to much higher levers, especially for the top Class A properties in the top locations in those markets. We do a lot of buying in these types of large, non-land constrained, cyclical markets of suburban assets. And we are sort of counter-cyclical there. We tend to run in at the cyclical lower levels in these markets. We are fond of saying here that we are running and buying when others are running out yelling fire.

And our all cash ownership structure really allows us a different underwriting risk metric. Allowing us to move into these on a counter-cyclical basis to these large cyclical markets. And we can, with this all cash model, substantially reduce our cost basis in these properties and position them to potentially achieve superior gains in rates of return without the use of debt.

Our last business segment, which is fee income from investment banking, we are as optimistic in '07 as we have been in a number of years. But the run up in property prices, which has reduced product flow for our bank in the last several years, appears to be leveling off a bit. And we have worked hard to develop some better, non-competitively good sources for attractive property investment.

And our investment-banking peak, which was about 2002, we placed over $230 million in equity. The last few years, however, have seen steadily decreasing investment-banking business down to a low in 2005 of about $138 million in equity capitalization. Last year '06 saw the first significant improvement in our banking business to $170 million in equity capitalization from the $138 million of the year before.

And some recent news, in January of '07 we did commence a new syndication as part of our real estate investment activities with an opportunity to place up to $221 million of equity. Visibility of potential real estate investment-banking opportunities that fit our investment criteria are better now than they have been in several years.

Finally, I will remind you that we have 11 individual properties that reside in standalone REITs outside of FSP, which we sponsor and manage for investors. The original syndication price of these properties was approximately $694 million a total square footage about 3.8 million square feet. As many of you know, we have in the past acquired certain of our sponsored REITs by merger. And we'll continue to evaluate them for any future acquisition potential, although we are under no obligation to do so.

Each independent REIT is valued and evaluated for its best and most effective usage including simply sale of the property in the open marketplace. As we begin 2007, we continue to be confident that FSP's financial position is strong, competitive, and very flexible within a broader capital on real estate markets. And anticipate continued growth and performance from our three major business components.

With that, we can open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Marvin Loh with Oppenheimer. Please proceed.

Good morning, George. Good morning, John.

Good morning.

Good morning.

George, thank you for the detailed overview. Could you provide maybe a little bit more insight into your suburban property markets? Probably focusing a little bit more on the contrast between what you're seeing in your property markets, versus what we see unfolding in the largest city kind of focused transactions -- where there seems to be a lot of transactions at really historically low cap rates.

Generalities are tough, Marvin. But in general in these large sort of non-land constrained markets, excuse me. I'm just getting over a cold. Markets like Houston, Dallas, Denver, they are cyclical. And they have money rush into them for properties and rush out of them in fairly large cycles.

What we have found is that when money rushes out of those markets, it rushes out fast and there are opportunities. The opportunities that we try to take advantage are buying properties that are really the A-plus, infield type location properties in just the really drop dead locations that we can get substantially below replacement costs, and with we think great cyclical opportunity to rise when those markets heap back up again.

And you can hear, for example Dallas is a great example. Everybody talks about the vacancy rate in greater Dallas being 25%. And it may be in greater Dallas 25%. But in the Platinum Corridor on the North Tollway in Dallas it's not 25%. In most Class A properties there is very little vacancy, 5%. Now that has changed dramatically since the cyclical lull of Dallas. Dallas is coming back and coming back fairly strong, but you have to look at the sum markets.

The falling tide in these big cyclical markets sort of drops all ships. And when we come in there with our all cash model, we can underwrite a different level of risk if we don't pick the bottom, if a tenant goes bankrupt on us, if there's a problem that the rest of the market with debt simply can't underwrite. And we can. We can get those properties and we can hold them until the cyclical highs, and come out the back end in a very good way. In suburban properties, unlike for example core CBD properties, five to ten-year timeframes for hold and turnover relative to the cycle that you're buying into is pretty reasonable.

And so, when we're talking about gain on sale being an important component to our real estate investment philosophy, it is inherent in the type of properties we're buying and in the locations we're buying and the way we're buying them. Holding a suburban office asset in a big non-land constrained market for 20, 30, or 40 years may not be the most prudent thing to do. That is different than, for example, Midtown Manhattan. It might be quite prudent to do.

So in our markets, Houston, Dallas, Denver, some of these big mountain land constrained markets, they certainly have lagged the recovery of New York, Washington DC, and some of the other markets that people talk about, LA, Orange County. But they are now really hitting their stride. And in the right locations in those markets, we are seeing significant appreciation in properties and significant cap rate compression, maybe not on the order of Midtown Manhattan, Marvin, but we bought it at a higher cap to begin with than Midtown Manhattan.

So, then to kind of take that to the next step, it would seem that you're saying that many of your investments over the last five years, whether you were a public company or a private company at that point, are fulfilling kind of some of your hurdles. And therefore, it would be time to kind of slop out of those properties and move into those again where there isn't -- that there are not a lot of buyers.

When you go through that analysis, what happens -- and I understand the total return concept. But as we look quarter-to-quarter or maybe even year-to-year, when you go into new properties what can we expect rental rates to do and rental income to do? Is it diluted at all at the short term and ultimately largely accretive from a book perspective? Or, do you at least try to make the transactions neutral to accretive?

A good question. And it varies from property to property. Again, when we talk about accretive, we talk -- it's not the technical definition of it. But when we talk about it, we talk about the total rate of return. In other words when we sell a property we are gauging in our own minds what the potential of that property is both on rental income and capital appreciation over, for example, a five to ten-year period, the next five to ten years; versus an acquisition opportunity that is in front of us that may be a new property, a bigger property in a different market or in a different location in a market that we believe has more potential over the next five to ten years.

On a current rental income basis, the new property we're buying can be immediately accretive or immediately dilative. Usually not much on accretive or dilative the vast majority of the properties we buy are immediately accretive slightly on the rental income phase of life. But on the longer-term rental income spectrum and the capital appreciation spectrum, we believe they are massively accretive. They just may not be massively accretive day one that you sell a property and trade that rent for the day one rent on the new property you buy.

Okay, okay. So, if I look at kind of this concept relative to some of the properties that you sold in the fourth quarter I guess going into the first quarter, are there more proceeds that need to be invested than what's been announced? Kind of back to the envelope, piecing together some of your Qs. It looks like there's about $30 million left that would need to be reinvested. And I don't know if that number is anywhere close to the actual amount.

I don't think it's quite that high, Marvin. I think it's probably more about $15 million. One of the things we did is we -- if you're just tracking property sold and property bought, it's hard to track the numbers. Earlier in the year and last year we bought more property than property we sold. So we took cash off of our balance sheet versus cash from a property sale.

So over the last couple of years, if you look at all the properties sold and all the properties bought, we probably still have about $15 million to invest. And that is in effect sitting on the balance sheet now, and that we do have an eye to several acquisitions that that money will get invested in. And likely more than that so that when we sell another property we'll actually be over invested versus properties we've sold.

Okay, okay. And from a cash perspective, it would be sitting in either a cash or short-term investments?

Correct.

Is there a target that you have internally with regard to how much cash you need to run your operations? I understand without a debt component you need to have probably more cash than a traditional REIT. But do you have a target number? Are you kind of at that number, a little bit above where you want to be longer term?

We analyze that every year based upon lease expirations and what we're trying to do on different properties. And we try to look forward several years as to what we need as well, as well as plug in a contingency fund.

John, do you have any specific metrics on that?

I think we like to have a couple quarter's worth of dividends, cash on the balance sheet, which might be in the order of $40 million to $50 million. At the end of a particular quarter, that's probably a good number. That's sufficient to cover our short-term CapEx needs where we ended the year at about $75 million, of which about $15 million, as George said, is excess cash we have available to invest in real estate.

We do have some tenant improvements and leasing [permissions] that we'll put in with buildings that we're trying to lease up this year. So having a little excess cash to cover some of that is going to be helpful.

Okay, thank you. If I can switch gears a little bit here kind of looking at your investment-banking business, last quarter you had mentioned that there was a $70 million transaction. It kind of looks like you were able to close that within a quarter. And if I'm reading that correctly congratulations, cause that looks like it's the biggest quarter that you've had in that business.

You also mentioned that the deal was a little bit different but you couldn't give details cause you were in the process last quarter. Is there any insight into what was different about the transaction this time around? And some insight into how you were able to close such a large number during the quarter?

In these private placements I don't want to go into too much detail. The offering is completed, so we are not under Reg D, Marvin. But that transaction was a central business district property in Minneapolis. And that transaction is interesting and different than properties that are in Franklin Street portfolio in one major component. That property actually has a mortgage loan on it that we placed, a permanent mortgage loan on it.

And the very sort of unique part to that property, i.e. its tenancy and its location. it's a fairly new central business district property in Minneapolis, really lent itself because the income was so stable. And the current years, with such good credit really lent itself for our outside investors who take a different risk reward parameter in their investments: obviously they sacrifice liquidity, large initial investment, minimum investment of $100,000.

That mortgage loan on that property, on that type of property, risk reward adjusted, made that very attractive for them. And I think both on the property side as well as the leverage side it was attractive to this group of outside investors that we have been dealing with for a long time. And I think that's one of the reasons that the equity sold as fast as it did.

What was the -- and I know you've provided the statistic before - I believe the participation rate with existing investors.

We have been averaging, and this property was no different, we've been averaging about 82% over the last five years, repeat investors. These investors that have been with us, some of them have been with us for 15 years. And this property hit those parameters. So we access new money or new institutions or wealthy individual investors probably on the average of 10 to 20% new per transaction. Most of these, the relationship has been established long ago. And this is when they were just starting to invest with us.

Okay. And George, you had mentioned, and I think also in the press release, a $221 million transaction. I know that's probably under Reg D restraints. But can you tell us if the syndication process is in fact beginning. You own the property at this point?

We own the property and the syndication process has started. That's about all I can say.

Okay. But $221million would represent, as far as I can tell, the largest transaction you've ever tried to close.

That's correct.

Great and just one last question. As you approach cash flow being able to cover your dividend in full, what is your dividend pay out philosophy? Should we expect some sort of increase if AFFO gets to 100% if not more of your dividend payment?

That's really a decision of the Board. And it's made every quarter. And it really stands on its own every quarter with the Board. I think, Marvin, though in general when we listed our company we were hopeful that the public markets would value our increase in shareholder equity as well as our dividend and our entire business.

As you know, right now compared to other office REITs, our dividend is fairly high. And our increases in equity per share at this point at least have not been valued the way we believe potentially they could be in the future. And so, I think we want to make sure that the public markets get to know us well in a general sense. But in terms of dividends, in terms of actually making a decision on what dividend is paid is really a quarter-by-quarter process at the Board level.

Okay, thanks for taking my questions.

Thanks, Marvin.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Eric Anderson with Hartford Financial. Please proceed.

Good morning, gentlemen. I apologize if you covered this question in the very beginning of the presentation cause I joined the call late. But I was just interested in knowing a little bit more about the properties that were sold during the fourth quarter. It looks the one in South Carolina was sold at a loss. And just wanted to know a little bit more about the transaction.

Hi, this is George. Just to give you just sort of a dollar recap. In 2006, well in 2005, let's go back. In 2005 we sold five properties for gains. Those gains totaled about $31.2 million. We also contributed some land at $339,000. And we sold one property in '05 for a loss of about $1.1 million. In 2006, we sold six properties. Total gains were $66,287,000 in '06. And we did sell one property in South Carolina for a loss. That loss totaled about $4.8 million.

I mean is it that it's basically, you've decided just to move out of it because you feel that it was no longer going to appreciate or --?

Most -- when you own properties off cash you're really never forced out of them. So your decision on what to do with them is really based upon what you think the future of that property is in it's location. And most important what you have to invest in a property to earn what you think you will earn once you invest that money.

In both cases the property we sold in '05 at a loss and the property we sold in '06 at a loss, both of those properties we felt that when we looked at the capital we'd have to invest to position those properties for lease up, and the return on that original purchase price and the capital we'd have to put in, TI's, leasing commissions, et cetera, we just felt we could take the net sale proceeds as they were and get a better return on those proceeds over the next five to ten years than putting that money into the properties. And the property we sold at a loss in '05, that was a single tenant property where we anticipated the tenant was going to stay. And they left. They actually merged and moved to another facility.

And in the '06 property, we had a very large tenant in South Carolina. In '06, we had a very large tenant go bankrupt. And we, to refill that space, the money we would have to put into that property, we felt we could do better with simply taking the proceeds and reinvesting it elsewhere.

Okay, that's good color. Just one final question, can you just comment a little bit on the trends in rents that you're seeing in the Texas marketplaces of Dallas and Houston?

They go property-by-property and location-by-location. It's hard to generalize. In general the real good sections of Dallas and Houston, which are our markets, are seeing fairly significant rent rises at for. Just for an example we have one property, Addison Circle on the North Tollway in Dallas. It's really one of our nicest properties. And it's the headquarters actually of a lot of real estate companies.

When we bought that property, rents in that market -- we bought that property five or six years ago-- rents in that market were $16, $17 a square foot. Rents in that market now have just moved in the last couple of years and asking rents now are $25 and $26 and $27 a square foot. On a percentage basis, for these kinds of markets, really significant moves.

In the Energy Corridor in Houston, where we are very active, there is very, very little vacancy. We are seeing significant rent moves in that market as the energy business ramps up for the needs, really, of the world. And Houston really still is the energy capital of the world.

We, for example, built our first spec office building in the Energy Corridor in Houston as a six-story building. That's really a sister or mirror building of one we own. We contributed the land for an interest in that property. That building was completed on time, on budget. We have just signed a lease with a major New York Stock Exchange company for four floors.

They have an option to take the fifth and sixth floors, partially leased to a couple of tenants at this point. So we're about 80, 85% leased right now. And rental rates in the year and a half since we decided to build that property are up 20 to 25%. We are achieving those and have our rents gotten into the leases. So there again, they're not Manhattan rents that went from $50 to $100 a square foot, but they're fairly significant for those markets and for any market for that matter.

Good. Thanks, very much.

At this time there are no questions in queue. I would now like to turn the call back over to George Carter for closing remarks.

I just wanted to thank everybody for their support. Since we've been public we've had a real great two years in terms of what we've been able to earn and grow our company. And we very much look forward to '07, and hope you all will continue to look at us and follow us and invest with us. Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a good day.