Franklin Street Properties Corp (FSP) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Street Properties First Quarter 2009 Earnings Conference Call. My name is Oneka and I will be your 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 Scott Carter, General Counsel. Please proceed, sir.

Good morning, everyone. And thank you for joining us on 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 Risk Factors section of our annual report on Form 10-K for year ended December 31, 2008, which is on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, April 29, 2009. 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 will turn the call over to John Demeritt. John?

Thank you, Scott. Welcome to our earnings call. We're going to be talking to you about our first quarter 2009 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 the 10-Q that were filed last night. The turbulence in the markets that we talked about last quarter continued during Q1 with many office REITs being affected and the price volatility has been very dramatic.

However, the strength of our balance sheet as we go through this abyss should serve us well and enable us to grow as we move ahead. As of March 31, we had cash of $27.7 million and $178 million in availability on our line of credit, to operate FSP and/or fuel future growth.

We finished the quarter with a leverage ratio of 14.9% with $147 million in debt outstanding and shareholders' equity of about $843 million. Our shareholders' equity is held by our common shares only, as we do not have any preferred shares or other equity instruments.

The $147 million in debt is all unsecured and consists of our outstanding line of credit balance, which was about $72 million and an unsecured term loan of about $75 million. The line of credit matures in August of 2011 and our term loan can be extended to October of 2013.

I think this balance sheet paints a solid picture of FSP at a time when there continues to be general concern about the availability of debt from financial institutions and debt levels at many companies. We may see some issues with leasing and investment banking as we move through the down part of this cycle, but we have the strength of our balance sheet as ballast.

As we said before, we measure our performance with three key drivers, which are real estate operations, investment banking, and gains on sale of assets or GOS. The real estate operations driver is our ongoing net leasing or rent revenues from our portfolio of properties, which is a recurring business.

By contrast, gain on sales of assets and investment banking are transactional in nature. And even in normal markets, the quarter-to-quarter results from them can be very choppy. During the first quarter of 2009, we did not achieve any GOS or sales of properties in this market, because it just didn't seem to make sense.

Investment banking profits come from fees earned on the value of shares of securities we sell as private placements. The sales of these private placements are what we call gross syndication proceeds. The income derived from the sale of private placements is essentially syndication and transaction fee revenues on our income statement less the impact of direct expenses, which are commissions, some G&A expenses and related income taxes.

Sales of private placements have been impacted by the financial markets, and we had a relatively insignificant $175,000 worth of sales in Q1 '09, compared to $2.7 million in proceeds in the first quarter of '08. And really, neither period was very meaningful.

With respect to our performance in the first quarter of 2009, we had GAAP net income of $7.8 million and EPS of $0.11 per share. We measure performance of real estate operations and investment banking by FFO, which for the first quarter was $17.3 million or $0.25 per share. Comparing the first quarter of 2009 to 2008, net income was higher by about $400,000 and EPS was about $0.01 higher with rounding, comparing the quarters.

The increase was primarily from performance of our real estate portfolio that was up about $700,000 and was partially offset by lower contribution from investment banking of about $300,000.

Moving to FFO. For the first quarter of 2009, our FFO per share increased $0.03 to $0.25, compared to the first quarter of '08. On a dollar basis, this was an increase of about $1.7 million. The reason for the increase in FFO was also from performance of our real estate portfolio that was up about $2 million in FFO and was partially offset by lower contribution from investment banking.

The increase in real estate performance was primarily from three properties that we acquired in the last 12 months, including a property in Houston that we acquired in May 2008 and two properties we acquired in December of 2008. One is located in northern Virginia and the other one is near St. Louis in Missouri.

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 supplemental schedules in it, including information about the 12 single asset REITs we manage and include two that we currently have investments in. There's also a current-owned real estate portfolio there if you're interested. And I also wanted to point out that our supplemental package will be filed soon for you.

That concludes the financial highlights. And at this point, our CEO, George Carter, will tell you more about FSP results and where we are. Thanks for listening. George?

Thank you, John. Good morning, everyone. As John has said, for the first quarter of 2009, FSP's profits, as represented by funds from operations and gain on sale of properties, totaled approximately $17.3 million, or $0.25 a share. Dividend distributions declared for the first quarter of 2009 and payable on May 20 will be approximately $13.4 million, or $0.19 per share.

Taking a closer look at the components of our profits, we will start with GOS, or gain on sale. As was the case with all of 2008, we listed nothing for sale in the first quarter of 2009. And, probably, there will be no properties listed all year long in 2009. We are likely not to list properties for sale or try to execute sales until the overall market improves and you're really looking at occupancy improving for commercial properties and rental rates improving.

Until those start to improve, we are not likely to be selling properties. Those metrics tend to improve when employment improves. And as most of us know, employment is usually a lagging metric to the economy. And even when the economy starts to recover, many times tenants not only wait to start employing, but also pack people together in existing space and wait before they start to lease. So again, in typical cyclical downturns -- and this obviously is an exceptional one -- this can be a long period of time.

In addition, we would need mortgage availability to return in competitive amounts and at competitive prices. So the length of this recession and exactly what's going to happen on the ground is anybody's guess, but we probably should prepare for a longer haul relative to the GOS, gain on sale component of our portfolio.

And so you might say, well, why even talk about GOS at all, if it's probably a likely distant, far-off plan? And we talk about it because we believe it's a very important part of the real, longer-term rate of return on such a traditionally cyclical asset class, like commercial real estate.

Near-term valuation metrics, like NAV, for currently owned properties is an interesting exercise. But until you actually sell a property, and integrate that sales price, a gain or a loss, into that property's rental income production over its time of ownership, you haven't achieved a true measurable property-generated return. Selling good properties when you want to and not when you have to is important.

Cap rates rise, i.e. rental income multiples fall, during periods of falling occupancy and falling rents, like now. And cap rates fall, i.e. rental income multiples rise, during periods of rising occupancy and rising rents like was going on in '04, '05, '06 and part of '07. When do you want to sell? When do you want to buy? You clearly want to try to sell at times of lower cap rates, and you clearly want to buy at times of higher cap rates.

Losing site of this purest and most fundamental investment return characteristic of a cyclical commodity-like asset class -- that of commercial property square footage can lead to over-levering and financial engineering, and consequently, much higher investment risk along with the lack of flexibility and the inability to take advantage of cyclically, well-priced acquisition opportunities.

Every property we purchase is invested in originally and managed for both its rental income and, ultimately, its gain on sale. It's just GOS, or gain on sale, tends to happen in bunches, mostly at cyclical peaks. And rental income, at least at some level, tends to happen all the time.

During the first quarter of 2009, our investment banking group raised, as John said, an insignificant amount of equity capital. And that's fairly similar to the second half of last year, particularly the fourth quarter. Concern and uncertainty continues to surround the potential impact on commercial real estate emanating from the US recession and financial credit crisis. And our established investor clients continue to sit on the side lines until a clearer sense of stability returns to the broader capital markets before considering significant investment purchases.

The lack of equity-raising activity resulted in our investment banking business segment, operating at a loss for the quarter, as we did last quarter, totaling approximately $800,000 or about $0.01 a share. We anticipate this business in this area to remain very, very volatile, quarter-to-quarter, as long as the broader investor market activity and financial events continue to meaningfully sway investor confidence and sentiment.

We are, however, very committed to maintaining our bank's full capabilities. Our in-house infrastructure of people and systems is being maintained to its fullest. Our single asset sponsored REIT investments outside of FSP are getting intensive asset management attention and we fully understand that our loyal investment banking clientele is our bank's most valuable asset.

The bank -- for those of you who have followed us for a while know -- is a tremendous business; a tremendous profit-contributor in the up part of the cycle. What we really need to do is we really need to feel the bottom here of these markets. No one wants to catch a falling knife. Everybody who has stuck their hand out, so far, has gotten whacked. The investment markets may be finding a bottom now.

The stock market chatter and talk is significant, now, on the rally that's occurred, whether it's a false rally, whether the economy is really bottoming or not, we'll see. We're anxious like everybody else to find out the facts. Certainly, in the first quarter of '09, REIT prices and the chatter and talk regarding commercial real estate was not positive and gave all of our investors, like other investors, real pause.

While profits continue to suffer in the first quarter of 2009 from our two transactional businesses, that is, obviously, gain on sale and investment banking, our real estate portfolio of 29 properties, maintained its overall 93% occupancy and provided steady rental income. FFO for the first quarter of 2009, as John said, was $0.25 per share, all of which came from our real estate operations, net of the cost of maintaining our investment banking capability.

We continue to be real proud and pleased with our real estate portfolio. And what we're really seeing is the benefits of our upgrading that portfolio during that cyclical peak between '04 and '07 where we sold properties and we believe -- mostly through 1031 exchanges -- traded into properties that are clearly able to handle better this downturn in the economy.

Our occupancy is clearly above the national average for like-type properties around the country. But, we do have lease roll for the rest of '09 and '10. We're working on it and actually making some very good progress in some areas on that lease roll. We're feeling optimistic that we'll handle that well. But, obviously, all the lease roll in 2009 and '10 is subject to market forces.

And when you look at lease roll on existing properties, you also need to think about us continuing to acquire new properties, which we are doing. And most of the new properties that we acquire tend to have longer leases, more credit tenants, higher occupancies. And so some vacancy gets offset in existing properties by new acquisitions.

While profits continue to suffer -- excuse me, during the first quarter of '09, FSP did not purchase any new properties for our portfolio. A number of potentially attractive property investment opportunities were analyzed, but ultimately, were not purchased during the quarter. Continued active property acquisition efforts are ongoing and we would expect to acquire additional properties in 2009.

Our three property acquisitions that were made during 2008 are now fully contributing to FSP's rental revenue and FFO growth. You can see the effect of the three properties that we purchased in '08, as well as our upgraded portfolio. Clearly, you can see those numbers on the rental revenue line of our income statement for the year-over-year period, as well as in our FFO number.

One of the interesting things that is happening out in the property acquisition market -- sort of a change is starting to occur and I think I mentioned this last quarter -- is that we're starting to see real estate owners who really need capital and who really need to sell. Instead of culling out the questionable or poorer performing properties in their portfolio, they're having to put on the market some of their better properties.

The market is so thin -- trading activity and properties are so sparse right now that it's really only the best properties that you clearly can count on trading. And even then, there still continues to be a difference in expectations between buyers and sellers. Sellers continue to chase the market down. Being acquirers and not sellers, right now, Franklin Street is maintaining a lot of patience and a lot of discipline in the acquisition process. We think that is very, very important.

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

Those are my prepared comments. Now I'd be happy to open up for questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Dave Aubuchon with R.W. Baird. Please proceed.

Thank you. Good morning. Can you provide a little bit more information about your owned portfolio's performance this quarter -- same store revenues, NOI? What sort of leasing activity was done during the quarter and the rent, either growth or a decline of the leases that you signed?

Well, the supplemental package will be coming out in a couple of days with the NOI information in it, Dave. And also, for people who are listening, Dave is an analyst that covers Franklin Street and we're happy to have him on the call.

As far as leasing activity goes, there wasn't a significant amount of new leasing during the quarter because we didn't have a lot of leases that matured during the quarter. I think we have some lease maturity activity in the back half of the year, which is still being worked on.

Same store was fairly static. Existing rent increases that were inherent in the leases obviously kicked in. As John said, not much new leasing was done, but leases that were in place held. No new significant bankruptcies in the first quarter, which was good news. And that's one of the things, Dave, as you know, that come out of the blue at you.

So we're -- when you look at that rental revenue line, which is I think -- again, year-over-year obviously shows a substantial rise. I think you would say that the vast majority of that rental revenue line increase came from the three new properties that we acquired in 2008 -- fairly static rental occupancy and rent levels on the same store sales or existing property portfolio.

Great. I do have a question on that. But before we get there, can you -- is there any more clarity regarding the several big leases that are expiring this year and, obviously, the biggest one being the Capital One LandAmerica deal?

Yes. Again, without getting too specific -- because we're in negotiations on a lot of these. We are making, generally speaking, some progress. We're pretty optimistic around here right now about a lot of the leases that are expiring.

The biggest one, which you refer to is a property, for those out there that don't know, we talked about last quarter on the call, is a property in Richmond, Virginia. That property is fully leased to Capital One Financial and Capital One is fully paying the rent.

In the fall, that property comes off lease with Cap One and would have gone to a direct lease with a Cap One subtenant, LandAmerica. LandAmerica has filed, some time ago, for reorganization under Chapter 11. And the real question is, when we come off lease with Cap One, who is there to lease that particular property? And that is the single biggest potential hole in the occupancy and rental stream. And again, that would occur in the fall.

Dave, what we don't know yet is what the final verdict from the bankruptcy courts and LandAmerica will be. They've pushed off final decision on this. We're likely to hear in July or August -- we hope to hear then. If we do, I think that we'll have very specific updates on the next quarterly call. I think the actual date right now that the courts are supposed to let us know is June 24th.

The news, though, from the property on the ground is sort of interesting, in that, both LandAmerica, companies that bought parts of LandAmerica, subtenants, effectively of the subtenant and other potential tenants are fairly active at that property and that market and clearly have indicated desire to stay in space, lease space, et cetera, et cetera.

I can't give you a good prediction, Dave, but my gut, just watching stuff over the years, is that we are not likely to have a full hole there. We'll probably -- a partial when the smoke clears and we'll have to do some leasing there, but not all the leasing. But that's a guess and only a guess, at this point.

And I realize you don't want to comment too specifically on individual leases, but it sounds like as a general rule of thumb that you feel a little bit more confident regarding your leasing issues this year versus three months ago.

I think that's absolutely correct. Now, again -- and that's from activity that's happening. But, I want to qualify it. This economy, as everybody knows, is really moving fast. So, we're going to be subject to that.

Right. You mentioned that you still have a very real desire to acquire assets and you also talked about how difficult it is out there and that's very clear. What, sort of, assets in this environment are you most interested? I'm assuming you're not willing to take leasing risk, so that kind of boils it down to fully-leased assets. And, what sort of cap rates attract you under that sort of scenario?

You're right. We think, right now, that -- and again, this is just starting to happen more and more -- as I mentioned, sellers putting some of their better properties on the market and better properties fall into two categories. Price per square foot, cap rate, good credit tenants, longer term leases, high occupancies -- all of those things are things we're looking for.

And we're looking for properties primarily in our existing markets. As you know, we're geographically diversified. But we know those markets, we're in those markets, we have inside views of properties that are coming up for sale, know the sellers/owners in those markets.

Your looking at -- in our markets, for the kinds of properties we're looking at, which are really Class A properties, we are seeing anywhere between 8.5 and nine caps. These are real caps. These aren't the old underwriting caps. These are real cap rates. We are looking at prices per square foot, in most cases, substantially, 20% to 30% below replacement cost.

And are those cap rates and price per square foot -- are those numbers that, again, you're willing to invest capital at right now?

Yes.

Okay. Question on the balance sheet. Have you guys had discussions with lenders, be it the commercial banks for the life insurance companies, regarding additional mortgages, for your assets? And, did you have -- can you provide some sort of profile of what sort of metrics that they're looking at?

Mostly, the conversations I've had with the bankers -- the rates and the spreads are so wide right now, it doesn't make sense to borrow. And they're really dealing with a lot of companies that have debt maturities that are staring them in the face. And so, it doesn't make sense for us to pursue acquiring more debt at the moment. But that could change quickly, depending on how these markets change.

Dave, it's very -- we're finding it extremely difficult to acquire properties that have existing debt on them, whether that debt has been securitized or not, it's extremely difficult. Lenders are just very paralyzed in terms of doing that. I think most of them feel it's almost a liability issue to start changing terms or transferring debt to other owners. That's one issue.

The other issue is when you're going out on a property-specific mortgage look, we're seeing clearly much, much higher equity requirements than we were a year or two ago, as you might imagine -- much higher. And the interest-only loans are pretty much a thing of the past.

You are talking -- if you look at a ten-year loan, interest and principal, you are really looking at anywhere between 8% to 9% debt constants. So if you're looking at 8% to 9% debt constants and you're looking at 8.5% to 9% cap rates and you don't pay your debt with your NOI, you pay your debt with your cash flow, which is going to be 50 basis points below your NOI line on a typical property. It just doesn't work too well.

That's all the questions I had. Thank you.

Thanks.

(Operator Instructions)

Your next question comes from the line of Justin Pelham-Webb with Robert W. Baird. Please proceed.

Hi, guys. Just a couple of quick follow-ups to Dave questions there. I was wondering if maybe you could give a little more information on what happened at some of the non-consolidated REITs, East Wacker and Phoenix Tower -- just the occupancy differences versus last quarter? East Wacker coming down a little, Phoenix Tower going up.

Yes, those two independent REITs are public reporting REITs and they have out Qs and Ks. And you can pull those up and get the latest from our filings on them. Those are two independent REITs that FSP has investments in. And specifically, Wacker just had some general vacancy increase along with the market, nothing that's earth shattering. That's why the occupancy has gone down a little bit on Wacker.

On Phoenix Tower, which is our Houston property, we have been busily leasing up the space there that was formerly occupied by Washington Mutual. And we continue to make progress on leasing that space there in Houston.

So you have Phoenix Tower increasing occupancy slightly and Wacker decreasing occupancy slightly -- two large investments, public reporting, all stats are out there. FSP's got a much larger investment in Wacker and Chicago than in does in the Houston property. But both properties -- really quite stable and doing well.

Right. And maybe to remind me -- the East Wacker building -- is that the KPMG lease that they are eventually going to move to the Aon building?

Right. KPMG is the largest tenant. They have about three and a half years remaining on their lease with us. They are going to, at the end of that lease, move to the Aon building, which is virtually down the street from us.

Right, but that's three years down the road.

Yes, about three and a half.

Okay. Quickly, on the new development in Broomfield, Colorado -- do you guys have any update on that, in terms of maybe pre-leasing or how the market looks or how the development is coming?

I was just out there a little while ago. The property is -- construction is coming wonderfully. They've actually had, until quite recently, very good weather out there, very good winter for building. So we're on target in terms of construction and budget. We own the two properties next to this property that we are developing. And we are very actively working on several potential pre-leasing opportunities, which obviously we don't want to talk about in detail.

One of the -- the market in this particular sub-market, which is a heavily tech-influenced market and a heavily alternative energy-type of market, is strong and good. The occupancy levels and rent level there do not reflect the general malaise in the overall economy and have held up real strong.

So, we're real optimistic about that property. We are talking, not only to people in the market place for potential tenancy, but people in other states. And there's a lot of movement in the West, particularly from California to other places, including the Greater Denver area and Austin. So we're active there, Justin.

I can't give you too much more there. One of the reasons is that that is still actually an active syndication. And so until it's completely closed, we can't give a lot of detail.

Understandable. That is good information, though. Obviously, the investment bank is struggling in this environment, which is expected to some degree. In terms of how that's going to turn, when it turns -- is that historically something that turns quickly, something that you think may take a while to ramp up? When the animal spirit starts flowing again is that something that you guys are expecting to come back relatively quickly?

It has in the past, inasmuch as, our profile investor client is capital wealthy, does invest for the long haul, is more than capable and willing to be illiquid for the long haul. And they tend to be counter-cyclical investors, too. So you'd say, well, why aren't they buying right now? They're counter-cyclical once the bottom has been put in. And they're more than willing to fight for upside. But what they don't want to do, as I said, is catch the falling knife.

In the past, Justin, that has turned quickly. And this group of investors, actually -- we've been dealing with them and the next generation of investors, between us and our predecessor, for almost 25 years. So we've been through several of these cycles. I'm not sure anybody's been through one quite like this cycle. Maybe the early 70's was, from my perspective, at least, closer -- at least in terms of the stock market.

But in the past, once the bottom has been put in and the foundation is felt, that business tends to go up rather rapidly. And the counter to that, believe it or not -- and you can actually see it in our numbers, if you look back over the last couple of years -- as cyclical peaks start to hit and a lot of money is rushing into the equation, that investor group tends to back off a little bit. So, I'm optimistic that when we ramp up, we'll ramp up quickly. But this downturn has left some pretty big scars, so we're going to have to see.

Yes -- no it's super. That's all great stuff. That is all I have. Thank you.

Thanks, Justin.

Your next question is a follow-up from the line of Dave Aubuchon with R.W. Baird. Please proceed.

Thanks. We're tag teaming you here. George, your comments about the acquisition market just got me thinking a little bit more. Are you interested at all -- or I guess, what would get you interested in portfolio and/or more opportunistic, sort of, acquisitions, including looking at a lot of the publicly-traded companies that are out there? What may fit it into your portfolio? Can you just give me your initial thoughts about that?

Interesting that you would bring that up. We actually have interested inquiries and they haven't gone any further than just flags up the flag pole. So, obviously, if there was something specific, we wouldn't be talking about it and would be in a disclosure situation, et cetera. I'm talking very generally.

But generally speaking, we actually get a lot of interest and calls. But it tends to all head in the same direction and that is that total portfolios or companies tend to talk with us because we're so lowly levered. And they view it as a way, in some sort of combination or venture, to, in effect, offset their higher leverage situation with our heavily equity situation, and consequently, have a hole, which is where the risk has been ratcheted down, coverage ratios are higher, et cetera, et cetera. And that's understandable.

And all of those things are interesting to us and we pursue and look at them all. And we would do that. We would consider all of those. But so far, when you really look under the covers, most of those potential situations are -- you're sort of buying too many problems at too high a price with too much leverage.

And a lot of the companies that we've talked to and researched a little bit -- a lot of them have both loans on their properties and are in joint ventures with other real estate owners, which makes the process complicated and risky.

And you weigh that against simply going out and blocking and tackling and buying individual properties, one at a time, the way you want it, the price you want, the terms you want, without joint venture partners, without lenders that have onerous near-term maturities in your face, not knowing exactly when this recession will be over and when lending will come back. And risk reward adjusted so far, we haven't run down any of those paths.

The only thing I'd add to what George said is there's some parallels between acquiring a portfolio real estate and buying a piece of real estate that's already subject to debt. The lenders have been very skittish when it comes to assuming debt and things like that. If that environment changes, then the lending community does things that make a little more sense then perhaps some transactions could be possible. But in the current environment, we haven't seen that yet.

You're saying that they're skittish about you acquiring assets that have existing debt on them and then wanting to refinance?

No, I'm saying if you're a lender with secure debt on a particular property, some bankers are skittish about allowing you to assume the debt if you wanted to acquire it. I think that George was alluding to that earlier in the call. And I think the same holds true for lenders on portfolios of assets -- just there's a lot more debt maturities you have to negotiate with lenders on.

All right.

Do you follow what I mean?

Yes. All right. Thank you.

Your next question comes from the line of Paul Meierdierck with LaSalle Investment Management. Please proceed.

Hi, I don't know how that came out -- it's supposed to be LaSalle. But I just had a quick question for you guys. The Barron's article came out about a month ago. I don't know if you saw that, about the perils of real estate at arm's length. And it kind of talked about the tenant-in-common structures, which, I guess, are pretty similar are the single asset REIT structures that you guys utilize.

And similar to Justin's question, I just wanted to get your sense of what do you think the appetite among the private investors is for this SAR product, at this time? I realize they're going to have the same issues as the tenant-in-common structures, discussed in the article, given their lack of debt and no operating performance -- or no exposure to the operating performance. But as it relates to the 1031 exchange and things like that, I just wanted to get some color on that.

I read that article on Barron's, Paul. And, Paul, who are you with, again? LaSalle?

Yes, LaSalle.

Okay. Good. The TIC structure, the tenant-in-common structure is actually very, very, very different than our single asset REITs. Tenant-in-common, as you know, sort of generates itself from real estate owners selling real estate, not wanting to pay the tax on their gain and rolling those proceeds up into one transaction with other like-typed taxed real estate owners.

And the TIC industry, sort of, took off over the last few years as the service helped make that a little bit easier from a tax perspective. And to be just blunt about it, some of the underwriting and relative risk and reward characteristics of deals that were put together for a lot of TICs, sort of, in a way, used the tax savings that were generated by doing the TIC roll as an excuse to either overpay or over leverage or make other mistakes which have caused the fundamental performance of many of those -- not all -- by of those not to do too well.

We are not in that business at all and do not anticipate getting in that business, at all. Our investments -- we buy a piece of real estate. And we form a company to buy a piece of real estate. That real estate is bought, is owned by this Company. The company qualifies -- we intend to have that company qualify as a REIT. So we form, effectively, a new REIT. We buy the property in that REIT. FSP goes along that property. We are the sole common shareholder.

And then we sell preferred shares in that REIT to outside owners that come in and, effectively, pay us back, plus a fee for doing that syndication. These shareholders in our single asset REITs are not tenants-in-common, at all. They have no 1031 exchange benefit by coming into our investments. They are simply shareholders in a single asset REIT.

And the difference between investors who buy our single asset REITs and investors that, say, buy publicly-traded REITs is that we do no blind pools. We do not raise any money ahead of the property. Our investors get to actually see the property that they are investing in. It is a sole investment in that property. There are really very few tax benefits, except some depreciation on the cash flow.

And they would rather analyze a specific piece of property, its relative risk and reward and relative merit than either a blind pool or a larger public REIT. So it's just a way to invest in a specific piece of property, really no tax benefits associated with it. And I think that business just -- again, wealthy individuals investing in a specific piece of property, managed by professionals like Franklin Street. They've been doing this business with FSP and a predecessor firm for, again, some 25 years. It's a good business. It's a solid business that will, I think, has a very, very good future and is really not sort of tainted or wrapped up in that Barron's TIC business, at all.

Yes -- no, that's very helpful. Thank you. If you could give me a little more profile on the type of investors in your single asset REITs.

They vary. We have institutional investors, in large institutions that you would know the name of from large pension funds to just large investment funds. But the primary characteristic of our investor is they are primarily capital wealthy, high net worth, individual investors. Usually, very busy in their own lives, with their own businesses or own work, want to remain a passive investor, and want a professional manager and usually lower risk investment.

Most of our single asset REITs are unlevered or very low levered. Virtually 95% of all of our single asset REITs have never had a dollar of mortgage on them, ever. So most of our properties are unlevered and they buy them for income and long-term appreciation.

Okay. Thanks a lot, guys.

Yes.

At this time, I would now like to turn the call back over to Mr. George Carter for closing remarks.

Thank you, everyone, for listening to our earnings call. I hope to see some of you in New York in the first week in June for the NAREIT Conference. It's usually a very good one. If any of you are planning to be in New York and are interested in meeting with us there, please give us a call here at the Company and we'll be happy to set up an appointment. Thank you very much. Look forward to talking to you next quarter.