Franklin Street Properties Corp (FSP) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Third Quarter 2008 Franklin Street Properties Earnings Conference Call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Scott Carter, General Counsel. Please proceed, sir.

Thank you. 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, I must read the following statement.

Please note that various remarks that we may make about future expectations, plans and prospects for the Company may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the risk-factor sections of our annual report on form 10-K for the year ended December 31, 2007, and our quarterly report on form 10-Q for the quarter ended September 30, 2008, both of which are on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, November 5, 2008. 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 funds from operations, or FFO. A reconciliation of FFO 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 Demeritt. John?

Thank you, Scott. Welcome to our earnings call. We're going to be talking with you about our third-quarter 2008 results, and we'll start with a short overview. Afterward, George Carter, our CEO, will further discuss the quarter and FSP. I'm going to be brief. And we'll be referring to the earnings release and 10-Q that went out last night.

Before I start, I wanted to talk about our balance sheet. We've all seen the turbulence in the stock and credit markets these past couple of months. The strength of our balance sheet going into this abyss should serve us well, and enable growth as we move ahead.

As of September 30, we had cash of $35 million, and taking into account the $75 million unsecured term loan that we just completed, we have about $220 million in availability on our line of credit, to fuel growth in the fourth quarter and beyond. As of the end of the quarter, we had total assets of $997 million, and $105 million in debt, making our leverage ratio, then and now, about 10.5% of our total assets. The unsecured debt on our balance sheet matures in three to five years.

Our balance sheet is very solid at a time when there is general concern in the market about debt levels, and many are making an effort to delever. We may see some issues from economic conditions that could effect leasing and investment banking as we move through this down part of a cycle, but have the strength of our balance sheet as ballast.

As we've said before, we measure our performance with three key drivers, which are real estate operations, investment banking and gain on sale of assets, or what we call GOS. Investment banking and GOS are transactional in nature, and even in normal markets, the quarter-to-quarter results from them can be very choppy. We believe our overall performance is better evaluated over the long term.

For the third quarter of 2008, we had net income of $7.4 million, and earnings per share of about $0.11. We measure performance of real estate operations and investment banking through FFO, which for the third quarter was $17.1 million, or $0.24 per share. We did not sell any properties during the third quarter, and as a result, there were no gains on sale in our results for the third quarter.

Comparing the third quarter of 2008 to 2007, EPS was about $0.03 lower in 2008, pretty much entirely as a result of GOS of that amount that we had in 2007. If you strip that out, EPS was $0.11 per share for both Q3 2008 and 2007. FFO was also flat at $0.24 in both Q3 of '08 and 2007. On a dollar basis, there was an increase of about $162,000. The reason for the increase in FFO was primarily from performance of our real estate assets, which were about $600,000 ahead of the third quarter of 2007.

The most significant reason for this increase was the benefit of leasing that we've accomplished in the last 12 months that positively impacted this third quarter of 2008, compared to 2007. The increase in real estate FFO was partially offset by an FFO decrease from the investment-banking segment of about $400,000. This was because we had lower banking fees, compared to our third quarter last year.

FFO from investment banking is from fees, based on the value of the shares that we sell in private placements. For the third quarter we sold shares of these private placements of about $4.8 million, which was $5.1 million lower than the value of shares we sold in the third quarter of 2007.

FFO derived from the investment bank is essentially syndication and transaction-fee revenues on our income statement, less the impact of direct expenses, which are commissions and related income taxes, and also some G&A expenses. George will be talking more about the investment-banking GOS, as we believe turbulence in the markets and other external factors in the market have affected these drivers.

That covers our financial performance. The press release and 10-Q filing go into further detail about our results. I also wanted to point out that the press release has our usual supplemental schedules, including information about the 12 single-asset REITs that we manage, and include two that we currently have investments in. There is also a current-owned real estate portfolio -- information there, if you're interested.

I also wanted to point out that we will be filing our first supplemental schedule at the end of this week, or, perhaps, early next week, with some additional operating and financial data. That concludes our 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?

Thank you, John. Good morning, everyone, and thank you for taking the time to listen to our Third Quarter 2008 Earnings Call. My comments this morning, as usual, will follow my written comments in our earnings press release. As John has said, total profits for the third quarter of 2008 were approximately $17.1 million, or $0.24 a share. And Franklin Street represents its profits as a combination of FFO, funds from operations, and GOS, gain on sale of properties.

For the third quarter of '08, as in the first two quarters of '08, there were no property sales. Consequently, there were no gains on property sales. Very generally speaking, we believe the current market environment does not offer the best opportunity to achieve efficient, aggressive pricing on the sale of commercial properties. If you don't have to sell property now, and we don't, a better market is likely to develop when more liquidity returns to the commercial-mortgage product that is used to help finance the more traditional acquisition process.

So 100% of our profits for the third quarter was FFO. And our FFO, as John has said, is comprised of two components. One is the ongoing, recurring real estate operations, and the other is the transactional component of real estate investment banking. Since our real estate investment banking business operated at a small loss for the quarter, 100% of our FFO profit was generated from real estate operations.

With regard to our investment-banking business, continued turmoil in the investment markets during the third quarter of 2008 virtually shut down investor appetite for our real estate private placements. During the quarter, we raised only $4.8 million of equity capital, compared with $49.9 million in the second quarter of 2008, and $2.7 million in the first quarter of 2008.

Historically, we breakeven in our investment-banking business, on a quarterly basis, at about $12.5 million of equity-capital raised, and on an annual basis at about $50 million. Consequently, for the third quarter of '08, this business segment cost us about $216,000.

The bad news about this business segment is obvious. And that is it's transactional in nature, and can really suffer in times like this. The good news is that, in stable investment markets, the business can generate significant profits, as well as certain sponsored properties that Franklin Street can consider for potential future acquisitions.

The other piece of good news surrounding our investment-banking business is that even in the toughest of environments, like we and other investment banks find ourselves in now, the size, scope and overhead of maintaining the operating this business, for us, is relatively small, compared to our real estate operations.

With equity raised through the first three quarters of 2008, totaling approximately $57 million, our investment-banking business should produce a small profit for the Company this year. We anticipate this business to remain very volatile quarter to quarter, as long as broader investment-market activity and financial events continue to meaningfully sway investor confidence and sentiment.

While profits continued to suffer in the third quarter of 2008 from our transactional businesses being negatively impacted by the turmoil in the broader capital markets, our ongoing recurring source of profits, our real estate portfolio, consisting of 27 properties, maintained its overall 93% occupancy, and provided steady rental income.

FFO for the third quarter of 2008 was $0.24 per share, all of which came from real estate operations. On October 15, 2008, the Company used its balance-sheet strength to obtain a $75 million unsecured term loan. The loan was provided by banks that provide FSP's existing $250 million revolving line of credit facility.

The purpose for the loan is to increase capital to take advantage of property-acquisition opportunities that are beginning to present themselves at attractive prices, as a result of the current distress surrounding some aspects of the broader commercial real estate markets.

As the capital markets and US economy work through the current financial credit crisis, we will continue to pursue additional commercial-property-investment opportunities. It will be FSP's objective to continue to grow its property portfolio and rental-income business during this period of liquidity-constrained capital markets by using its balance-sheet strength to help finance and fund new acquisitions.

We will also look, for the first time in our company's history, to the broader capital markets via traditional Wall Street investment-banking firms, and their capabilities to help us access additional new capital for property acquisitions, and, in the process, hopefully gain some dedicated longer-term institutional ownership and ongoing analyst coverage.

We continue to be very optimistic about FSP's position in the current commercial real estate investment market, and the opportunities that are presenting themselves to acquire commercial properties at better pricing and value metrics than we have seen in the last several years.

With that, we'd be happy to open up for questions.

(Operator Instructions)

Our first question comes from the line of Eric Anderson, with Hartford Financial.

Good morning, gentlemen. I wonder if you could just offer a little bit of clarification. I believe it was either yesterday or the day before you had filed an 8-K that talked about the purchase and sale of a building in Chicago. It was unclear to me whether or not that is -- if that concerns the existing buildings that you have in Chicago, or if that represents a new purchase by either the Company or its investment-banking subsidiary of a building.

Hi, Eric. It's George. That would be a potential purchase of a new property directly into Franklin Street Properties. It would not be considered the investment-banking or syndication arm.

Okay, so that's just sort of something that you entered into a purchase-and-sale agreement assuming it passes due diligence?

That's correct. Because of the size of that potential acquisition, we are required to file an 8-K, as it is a material agreement that we've entered into. But it would be a direct -- if successful through the whole due-diligence process it would be a direct acquisition into Franklin Street Properties, and would be our second large investment in the Chicago Central Business District, our first being a significant participation in 303 East Wacker, which, in fact, was a syndication. This, as I mentioned, would not be.

And is that -- in reading through that 8-K, it looked like you were -- would be assuming some of their debt as part of the transaction? In other words, that it's -- part of the purchase price would already been -- already be financed. Is that the correct way to read that?

That's the correct way, yes.

Okay. Thanks for the clarification.

Thanks.

Okay. I would now like to turn the call over the George Carter for closing remarks.

Well, thank you for tuning into the call, everyone. We look forward to next quarter's call. And we hope to see some of you at the upcoming NAREIT annual meeting in San Diego. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone, have a great day.