Franklin Street Properties Corp (FSP) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Franklin Street Properties Earnings Conference Call. My name is Rob, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

At this time I would now like to turn the presentation over to your host for today's call, Mr. Scott Carter, Senior VP, In-house Counsel.

Good morning, everyone, and thank you for participating in this call. With me this morning are George Carter, our President and Chief Executive Officer, and John Demeritt, our Chief Financial Officer. Before I turn the call over to John, 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 be -- 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 annual report on Form 10-K for the year ended December 31, 2006, which is on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, October 31, 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 website at www.franklinstreetproperties.com. Now I'll turn the call over to John. John?

Thank you, Scott. Welcome to our earnings call. We're very happy to talk with you about our third quarter results. I plan to do a short overview of the results, and then afterward, George Carter, our CEO, will discuss further FSP in 2007 with you. I'll be brief, and I'll be referring to the earnings release that went out last night.

As we've said before, we view our performance over the longer term rather than on a quarter-to-quarter measure because of two -- two of the key drivers of our business are transactional in nature. Those are investment banking and gains on sale of real estate, or GOS, as we refer to it, which can be choppy.

That said, for the third quarter of 2007 we had net income of $9.5 million and EPS of $0.13 per share, and for the first nine months of 2007 we had net income of $51.7 million, or $0.73 per share. We measure performance of the properties we own and investment banking through our AFFO measurement, which for the third quarter was $16.1 million, or $0.23 per share. For the nine months of '07 we had AFFO of $53.6 million, or $0.76 per share.

We look at the measure of AFFO plus GOS which adds AFFO to gains on sale of properties as our total profits. For the third quarter we achieved total profits of $18 million, or $0.25 per share, and for the first month -- nine months of 2007 we had AFFO plus GOS as $71 -- $77.1 million, or $1.09 total profits per share. This total profit of $1.09 per share exceeds dividends paid per share over the same period -- over the -- the nine month period of $0.93 and reflects about an 85% pay-out ratio.

At this point we're three-quarters of the year through, and each of these metrics was lower in 2007 as compared to their 2006 periods. The reasons for the decreases are primarily three. The main reason for the decrease was that in 2006 through nine months we had recorded about $6.5 million in termination fees, while in 2007, we've had only about $60,000 in termination fees.

This causes a blip when it's received, and as we've leased the space, which can have some period of vacancy, performance is comparatively lower, given the size of the termination fee involved and the leasing economics. This affected the comparison of net income, EPS, and AFFO in the nine months ended September 30, '07, compared to '06.

The second reason within our real estate segment was that our property sales, or GOS, for the first nine months of '07 was $23.5 million, or about $10.9 million lower than last year. This affected net income, EPS, and our AFFO plus GOS measure for the nine months ended September '07 compared to '06, and George will be speaking more about this in a few minutes.

The third reason related to investment banking -- we earn fees from this business based on the value of shares that we sell in private placements. For the quarter we sold shares in these private placements of about $10 million compared to $15.9 million in the third quarter of '06. George will also be talking about this, as we believe that broader external factors in the market have affected both our GOS and our investment banking this quarter.

For the nine months of '07 we remain ahead of last year's pace, however, we've sold shares of our private placements this year of about $119 million through nine months, compared to $100 million through nine months of last year.

These three decreases combined are most of the explanation of our results comparing '07 to '06. Some non-cash expenses affected net income a little bit more. We had some benefit of cash flow from properties that we merged in '06 that benefited us this year, which was offset by the impact of some property vacancies that we're in the process of leasing.

That covers our financial performance. The press release and the 10-Q filing go into further detail about our results, and both are available. I also wanted to point out that the press release has our supplemental schedules and the current real estate portfolio if you're interested. That concludes the financial highlights, and at this point our CEO, George Carter, will tell you more about the quarter and where we are. Thanks for listening. George?

Thanks, John, and welcome to our third quarter earnings call. Thank you for taking the time to listen in. I'm going to apologize up front. I -- I have a cold, and if I go into a coughing fit or something, please excuse me.

Let me start by repeating what I've said in past earnings calls and that is that Franklin Street Properties is an investment firm, specializing in and focusing exclusively on the asset class of real estate. Our Company has three major business components that contribute to its profitability. They are rental income, gains on sales of properties, and fee income from our investment banking business. Two of these sources of profits are transactional in nature -- gains or losses on sales of properties and fee income from real estate investment banking -- and one source of profit is ongoing recurring, and that is our rental income from our properties.

It is very important when you think about Franklin Street Properties to understand that every property we purchase is purchased and managed to achieve two objectives -- rental income and hope for future gain on sale. They are equal weight in our objective, and we do buy and manage properties to achieve -- to try to achieve both of those objectives.

These business components are actively managed by FSP in an attempt to generate competitive risk reward adjusted financial performance and are specifically designed to use the structural capabilities of our no-debt model. FSP has no permanent debt of any kind on its property portfolio or corporate business units. FSP also has no preferred or other classes of stock outstanding other than its common. Consequently, 100% of all revenues and profits at FSP, from all business sources, are owned by one class of security, our common stock.

As John said, because of the transactional nature of significant portions of our real estate investment business, our quarterly financial metrics historically have been quite variable. However, for the first time since our public listing on the American Stock Exchange in 2005, the recently completed third quarter was materially impacted by broader external financial, mortgage/debt, and investment market activity.

Specifically, properties we may have contemplated selling did not trade because of market conditions. Changes in mortgage loan availability and changes in the cost of those loans significantly disrupted potential sales of commercial office buildings and their pricing parameters around the country. Rather than sell in this tumultuous environment we decided to hold properties until some stabilization occurs in the mortgage/debt markets.

Right now a timeframe for this stabilization to occur is hard to predict, but some easing of liquidity constraints has been occurring since the Federal Reserve lowered the discount and Federal funds rates. And obviously we have a -- a Fed meeting today. We are currently in the process of re-evaluating our property sale opportunities that we had shelved in the third quarter.

In addition to the mortgage/debt markets being in turmoil during the third quarter, the industrial market for our equity real estate private placement business also suffered and negatively affected our Investment Banking equity-raising efforts. Investor uncertainty surrounding the potential impact on commercial real estate, emanating from the mortgage/debt market crisis, caused a wait-and-see attitude to prevail among many of our established investor clients.

As mortgage debt and commercial real estate asset liquidity have somewhat improved in the last month, so have investor attitudes. Currently our Investment Banking group is raising equity in two private placement preferred stock offerings, each representing ownership in a separate single asset office property.

While it is difficult to predict whether the worst is over relative to the current credit market problems and their negative effect on our transactional business components, some near-term relief is being experienced at the start of the fourth quarter.

While profits suffered in the third quarter of 2007 from our transactional businesses being negatively impacted by the broader capital market credit crunch, our unleveraged real estate portfolio and investment/business model appear well prepared to weather this broader debt market dislocation. We have the financial capability to maintain our real estate assets and operational businesses to the highest standards, with the objective to ultimately realize their full longer-term potential value.

As the capital markets work through the current real estate mortgage/credit crunch, we will remain conservative, disciplined, and patient, while watching for value investment opportunities that may be caused by the broader market's dislocation.

To facilitate our ability to take advantage of investment opportunities that may present themselves, on October 19th, we expanded and extended our previous $150 million line of credit at a lower -- lower borrowing rate. We increased availability on the line of credit by $100 million to a total of $250 million and reduced the interest cost of borrowing under a LIBOR option by 25 basis points. The expiration date on the amended facility is August of 2011.

We believe this 66% increase in borrowing availability comes at a potentially opportune time in the real estate investment cycle, when some other highly leveraged property owners are experiencing a more restrictive capital funding view from their lenders -- excuse me.

The following is a brief summary -- a third quarter summary of our three major business components. Our first business component, rental income for the third quarter of 2007, was about as expected, with leased square footage of our 27 continuing properties rising during the quarter and as of September 30th, at about 90.7% leased. Most of our office markets continue to show positive trends of absorption, occupancy, and rent growth, tracking the national published statistics for their respective geographical locations.

Relative to the current subprime mortgage loan problems, we have identified a total of nine mortgage companies that are tenants in our various properties. Combined, their square footage of approximately 78,000 square feet out of our total of approximately five million square feet represents about 1.5% of the square footage in our portfolio. We are monitoring and working with these tenants closely to recognize and minimize any potential negative effects that could arise from financial problems they may be having.

We have two properties that have been -- that we have been physically repositioning in 2007 from single to multi-tenant configurations -- a 117,000 square foot property in the Seattle/Tacoma area and a 146,000 square foot property in Silicon Valley. Both properties continue to make progress with virtually all of the significant construction, other than new tenant improvements to their specific to-be-leased space, complete.

Currently, we have 42,358 square feet leased at the two properties and 90,467 square feet under letter of intent and/or active lease preparation. So leasing has picked up substantially here as we have completed a lot of the construction on those properties. Approximately 1.5% of our total portfolio's leases are due to expire for the balance of '07. And approximately 283,000 square feet of our total portfolio, or about 5.6% of our total rentable square footage, is scheduled to expire in '08.

Our second business component, property sales, totaled only 107,000 -- totaling 107,000 square feet from one property located in Westford, Massachusetts, took place in the third quarter. And that actually was right at the very beginning of the third quarter. The gain from that sale totaled approximately $1.9 million. It was a small property that we bought early in our life span. The property that was sold was similar to other properties in Seattle/Tacoma and Silicon Valley in that it was a single-tenant facility that became 100% vacant at the end of the lease.

Unlike Seattle/Tacoma and Silicon Valley, this Westford, Massachusetts, property was, in our opinion, not a good candidate for multi- tenant conversion. We believed the property would work best for another single tenant, possibly an owner/user. Maintaining this strategy had the result of a longer vacant period for the property, but no significant capital repositioning expenditures were incurred. In -- in fact, a single-tenant user bought the property for approximately $11.5 million.

Subject to the current uncertainty in the mortgage debt/real estate transaction markets, we plan to continue to upgrade our property portfolio through selective dispositions and acquisitions. Proceeds from property sales, as well as other sources of capital, may be used to purchase our common stock under the provisions of our existing stock repurchase plan. During the third quarter of 2007, we purchased 285,600 shares of our common stock in the open market for approximately $4.8 million.

Also during the third quarter, our Board of Directors voted to extend for two additional years our existing stock repurchase plan, which was scheduled to terminate on November 1, 2007, to increase the amount of common stock that would be repurchased from $35 million to $50 million. By doing so, we continue to have flexibility to redeploy proceeds from any property sales into either our common stock or new acquisition properties when the relative financial opportunity is favorable.

The third business component of Franklin Street is our Investment Banking business, and Investment Banking activity for the third quarter of '07 totaled approximately $10 million, which was a dramatic drop from the first two quarters, which averaged about $50 million per quarter. Through the first nine months of 2007 we have subscribed about $119 million of permanent equity for property syndication. This compares with a 2006 full-year total of approximately $170 million.

Third quarter capital raising efforts from our Investment Banking group were adversely affected by the turmoil in the financial, credit, and real estate markets. Uncertainty has always been an enemy of our traditional investors' decision making to commit capital to our property offerings. The third quarter's financial market activity created much uncertainty in many investors' minds.

Traditionally, once a direction and magnitude-consequence to the economy and the markets becomes clearer, our investors become more interested in positioning capital. Currently, our Investment Banking group is raising equity from investors in two private placement preferred stock offerings, each representing ownership in a separate single asset office property REIT.

This is the end of my prepared remarks. We'd be happy to take some questions at this point.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Eric Anderson of Hartford Financial.

Good morning, gentlemen. Wondering if you're starting to see some attractive acquisition candidates out there, due to the dislocating effects that you just referenced.

Hi, Eric, it's George. It's very interesting out there right now. We -- we have clearly seen in the -- what I would call the B property area, a move-up in cap rates and definitely some opportunity to buy better value in that class.

In the A property arena we have not seen yet a large movement in cap rates or pricing. I think this debt crisis that -- that has fallen upon us is a little early in the game yet to cause those owners that are highly leveraged to let properties go at -- particularly A properties, at substantially lower prices. I think one of our -- one of our views -- and one of our reasons for expanding our line of credit was that if this debt market crisis continues to go on for a period of time, and I know there are differences of opinions on it -- but we think it possibly could -- this may be a slow torture here for a while.

Because of the leverage that was used over the last couple years the, in our opinion, excessive amount of leverage and poor underwriting standards for some of that leverage, there could be a real significant opportunity to buy Class A properties in locations at prices per square foot in cap rates that we haven't seen in quite a while.

We are extremely well-positioned to take advantage of that, being, obviously, an all-cash REIT and having our line of credit available. We are actively working with all of our sources to see if and when that opportunity ever becomes available. As of this moment, it is not. It traditionally takes, in real estate, a while if a crisis goes on long enough to sort of see blood in the streets, if you will.

And I would -- I would comment further by saying most of the public equity REITs, I think, are pretty -- pretty well -- pretty well financed and not in general over-leveraged. What -- where we have seen the over-leveraging, and potentially the opportunity, is in some of the private sector real estate investing, particularly over the last few years -- last couple of years. And so we're watching carefully, Eric. I think -- I think there'll be some opportunity, and we are trying to position for it.

Are you only interested, really, in A properties?

Not only, but primarily.

Good. Thanks.

Yes.

And your next question comes from the line of Bill Ford of Reinhart Partners.

Hi, guys.

Hi, Bill.

Hey, Bill, how you doing?

Just to confirm, as we start looking at this new credit line, this -- this does not represent a change from the no permanent debt strategy. That this is just more to sort of bridge between times when you want to be buying and times when you want to be selling, or --?

That's correct.

Okay. Okay. Good. Then the other thing was -- obviously you guys had gotten a second property for syndication at some point during the third quarter. Can you just comment on whether you guys had acquired that sort of before or after the market seized up, and was it just sort of ending up buying it right before, or do you guys just sort of have more confidence in the longer run opportunity with that property?

Can't talk about it too much because it is in syndication right now under private placement Reg D, but suffice it to say that -- that it -- it is a property that we actually had been watching and involved in for several years, and we thought an extraordinary opportunity occurred.

Okay.

Pretty much -- pretty much at the start of this crisis which I think precipitated the opportunity.

Okay. All right. And then the only other thing I would have would just be -- can you comment at all about sort of recent rent negotiations? Are there any trends that have changed sort of sequentially, or are you still seeing that the environment for occupancy and rents is still probably favorable and on a same store basis, you're starting to see your role in negotiations be positive?

I would still positive, and I think -- in the -- in really starting about at the -- well, really starting at the beginning of this year, in general, and I'm talking around the country, rent growth in most areas of the country slowed somewhat -- still growth, but slowed, and I think we generally have seen that in our portfolio.

But there are still on the ground the fundamentals in our office portfolio, as you can see by the increased occupancy, and I think in general around the country, again not getting market specific, but in general, are still quite positive. Occupancy growth is still out there, and rent growth is still out there. We are experiencing it, and I think most -- most people are.

Okay, great. Thanks guys.

Okay, Bill.

(OPERATOR INSTRUCTIONS). And you currently have no further questions in queue.

Thank you. In closing this call I would like to say the following -- that Franklin Street Properties' structure and position really, while -- while earnings and so on are down for the quarter and -- and for the year, really is in anticipation of cycles and situations like this.

We feel very well positioned in terms of our properties and our capital structure to take advantage of what we think will be potentially some very good opportunities over the coming months. I thank you very much for turning in to the call and look forward to talking to you next quarter.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference, and you may now disconnect at any time.