Franklin Street Properties Corp (FSP) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Franklin Street Properties Earnings Conference Call. My name is Lacey and I will be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the presentation over to your host for today's call, Mr. Scott Carter, General Counsel. Please proceed.

Thank you and good morning, everyone, and thanks for joining us on this call. With me this morning are George Carter, our CEO, and John Demeritt, our CFO. 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 Factors section of our annual report on Form 10-K for the year ended December 31, 2009, which is on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, May 5, 2010. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statement should not be relied upon as representing the Company's estimates or views as of any date subsequent to today. At times during the 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, our CFO. John?

Thanks, Scott. Welcome to our earnings call. We are going to be talking with you about our first quarter results and I will start with a short overview. Afterward, George Carter, our CEO, will further discuss our first quarter and FSP.

I am going to be brief and will be referring to the earnings release, supplemental package and 10-Q that were filed last night. I would like to start with our balance sheet, which continues to serve us well and will enable growth as we move ahead. As of March 31, we had cash of $22.8 million and about $130 million in availability in our line. This totals about $153 million in liquidity to help operate FSP and fuel future growth. Our property portfolio is well diversified geographically and has no secured debt. Properties with secured debt can have property-specific issues that could cause us to lose focus or contemplate a sale when the market isn't right for it. Since our debt is unsecured, it is viewed more like one property and can act to mitigate this risk. Geographic diversification spreads out local economic risk across the portfolio, which we think benefits shareholders over the long haul.

At the same time, our low leverage ratio provides a terrific loan to value for our lenders on our unsecured loans and also affords our shareholders a significant and more conservative equity investment than our real estate. Our interest rate coverage ratio is very high compared to our peers at about 10.3 times for the first quarter. We also finished the quarter with a leverage ratio at about 14.5%.

We have $195 million in unsecured debt outstanding and shareholders equity of $928 million. Our shareholders equity is held by our common shares only. We don't have any preferred shares or other types of equity instruments on our balance sheet. The $195 million in debt consists of our outstanding line balance of about $120 million and an unsecured term loan of $75 million. Our line matures in August of '11 and our term loan can be extended to October of '13.

I think this balance sheet paints a solid picture of FSP at a time when concerns about the debt markets remain. We may see some challenges with leasing and investment banking as we continue to move through the down part of this cycle. We have the strength of our balance sheet to see us through.

On the income statement, we measure our performance with three key drivers, which are real estate operations, investment banking and gains on sale of assets. The real estate operations driver is rental revenues from our portfolio of properties, which is a recurring-based business in nature. By contrast, the latter two, gains on sale of assets and investment banking, are transactional and even in normal markets, the quarter to quarter results from them can be choppy.

During the first quarter of 2010, we did not achieve any sale of properties, so we did not have gains on sale. This is because the sale of properties in this part of the cycle in this market generally didn't make sense, in our opinion. Second, our investment banking profits continue to be impacted by the lack of improving office property fundamentals in this economy, though we have noticed general investor confidence and interest has picked up. Investment banking profits come from fees we earn on the value of shares we sell as private placements. The sales of these private placements are what we call gross syndication proceeds or GSP and the fees we earn are based on a percentage of them.

The income derived from this is essentially syndication and transaction fee revenues on our income statement, less the impact of direct expenses, which are commissions, some G&A and related income taxes. During the first quarter, we achieved $2.1 million in GSP compared to about $200,000 in the first quarter of '09. Although that is an improvement over last year's first quarter, we continue to find the environment quite choppy and difficult to predict from quarter to quarter. George will be talking more about investment banking in this current environment shortly.

We measure performance of real estate operations and investment banking by FFO, which for the first quarter was $16.7 million or $0.21 per share. Comparing the first quarter of 2010 to 2009, FFO was down about $700,000 or $0.04 per share. The decrease was from performance in our real estate segment of about a million, which was offset by an increase in contribution from investment banking of about $300,000. Of the $1 million real estate decrease, about $800,000 of that was primarily a result of decreased occupancy in the real estate portfolio in Q1 2010 compared to 2009. The remaining decrease of about $200,000 was a decrease in distributions received from our investments in non-consolidated REITs.

The investment banking FFO for the quarter was up about $300,000 in Q1 2010 compared to 2009 as a result of the increase in GSP from the deals we worked on this quarter, compared to first quarter of '09.

That covers our financial performance. The earnings release supplemental and 10-Q filing go into further detail about our results and that concludes our financial highlights. And at this point, our CEO, George Carter, will tell you more about FSP, the results and where we are. Thanks for listening. George?

Thank you, John. Good morning, everyone. Thank you for taking the time to listen to our first quarter 2010 earnings call. As in past earnings calls, I will follow my written comments in our earnings press release yesterday, trying to expand and flesh them out a bit more than just the printed word. For the first quarter of 2010, FSP's profits as represented by FFO plus GOS totaled approximately $16.7 million or $0.21 per share. That is down $2.8 million from the fourth quarter of 2009. Dividend distributions declared for the first quarter of 2010 will be approximately $15.1 million or about $0.19 per share.

The sequential drop in quarterly profits occurred primarily from two things. First, our investment banking business in the fourth quarter of 2009 did about $40 million in equity raise and contributed profit to the Company in the fourth quarter of 2009. In the first quarter of 2010, the investment banking business only did about $2 million in equity raise and actually operated at a loss. The second factor was that the first quarter of 2010 was a full quarter of higher vacancy from two significant properties that incurred their lease role and consequent vacancy in the fourth quarter of '09, i.e. they only had a partial quarter of rent reduction effect in the fourth quarter of '09 versus a full quarter in 2010, those two properties being the Innsbruck property located in the greater Richmond, Virginia area that had LandAmerica as the major tenant, and Meadow Point, which is located in the greater Washington, DC market and northern Virginia, which had CACI as its major tenant.

For 2010, FSP's profit results are likely to have more quarter-to-quarter variability than in 2009. The transactional nature, success and timing of our re-leasing efforts of existing vacancy and upcoming lease roll in the portfolio will interplay with the timing of new property acquisitions and capital closings of private placement offerings through our investment bank to affect our profit levels.

As I said in last quarter's earnings call, 2010 will be a real hump year for FSP. It is the first really big full year of significant lease roll in our portfolio since the start of the financial crisis in 2007 and the subsequent cyclical slow down in the economy and commercial real estate. So I will try to give a little more color to what's currently happening within those three segments of our business activity that will in fact interplay to affect profit levels this year, those segments being leasing, new property acquisitions and investment banking.

So first leasing, and I will spend a little more time here because this, in my opinion, is our biggest challenge in 2010 and the more important issue that we face. Our real estate portfolio of 32 properties continued to provide steady rental income during the first quarter, with occupancy rising to 85.4% from 84.4% in the previous quarter. Several of our office properties though have significant lease roll in 2010 and as a consequence, we expect occupancy and rental income for the year from those properties to be lower.

However, we anticipate positive re-leasing efforts in 2010 for all of these properties. And during the first quarter, we saw strong prospective new tenant activity for all of them. And I will emphasize strong activity. We are seeing more activity in the leasing market right now than we have seen in the last two years -- a lot more. Now in most of our markets, not all, but in most of our markets, there is not more net square footage absorption going on and there is not net higher rents, but there are generally stabilizing rents and generally stabilizing occupancies.

And I think for those that model FSP, I've said before that if you were asking me what is an average on the portfolio rent roll down that we are incurring as we do new leasing or re-leasing, that 10% to 15% below expiring rent levels is still, I think, a good number on a portfolio basis. But it is dramatically different property to property and I do mean dramatically. But again, for modeling purposes, on the whole portfolio, as you look at the markets at the end of the first quarter, that 10% to 15% rent reduction number on new leasing is probably a good number.

Companies, credit tenants, corporations are now not afraid at all to reposition and move. As I said, there is activity in the market, but they are still afraid to do any sustained hiring. I mean, their paralysis has ended, but additional, again, sustained hiring, at least in the markets that we are operating in, has not yet started.

Since 2010 is such a large lease roll year for FSP, we anticipate updating our leasing progress from time to time outside of our regular quarterly earnings releases. That will be new for us, but we will do it this year, because we do have so much lease roll. What I would like to do right now is just take a minute and update some of the properties that I have talked about on the last couple of earnings calls. These are the biggest properties that have the biggest lease roll that occurred in the fourth quarter of '09, which certainly affected the first quarter of '10 and for the balance of full year '10. Again, these are properties that I have talked about before.

We have dozens and dozens of leases going on, smaller leases going on all the time and renewing and re-leasing in other properties. But these are where the big holes are and are coming. And what I am trying to give you here is sort of our view of what we really have active. I am certainly not going to talk about all the prospective tenants that are in some stage of investigating these properties, but really the active leases. These are leases that we are and tenants we are actively working with, either actively negotiating leases, have LOIs on, lawyers are involved, negotiations are going on. These are leases that we believe we have a very, very good chance of signing.

And I will caveat this section heavily. Please listen to the caveat. None of these leases may happen, all of them may happen, some are in between. One of the things that is going on in the market right now is, it's a tenant's market. The tenant reps know it. They are aggressive. There is more and more sort of bidding off landlords against each other and it is pretty organized and pretty formal. They will walk you down the path of a hard lease further than in the past and literally go to competing properties and see if they can get a better bid on that. So that caveat is in place.

Having said that, these are situations which are very active and which we feel very, very good about. We'll start first with the Innsbruck building. This is about a 304,000 square foot property located in the greater Richmond, Virginia area, actually Glen Allen. This was the building that we've talked about a lot that had LandAmerica as basically its sole tenant, huge tenant in our portfolio, that unfortunately experienced a bankruptcy. This building lease rolled effectively in the fourth quarter. And as we finished the first quarter of 2010, that property, Innsbruck, is about 35% leased. We are currently working with one tenant for about 172,000 square feet, which if we sign this tenant, will bring that property up to 91.3% leased. We are pretty far down the path there. We have signed a non-binding letter of intent and we are working on the lease as we speak.

The second property that also had a big lease roll in the fourth quarter of 2009 is Meadow Point. This is the property in northern Virginia, the greater Washington, DC area, that had CACI as its principal tenant. That property as of the end of the first quarter of 2010, this quarter, is 51.5% leased. We are actively working with two tenants, again, are fairly far down the path for another 57,500 square feet. If those two deals get done, that property will become 93.6% leased.

The next property that we have talked about in the past is Greenwood Plaza. This is in southeast Denver. Greenwood Plaza is about a 200,000 square foot property. The main tenant there had been Sybase that sort of morphed into New Era Networks. They had done a lot of subleasing to tenants even before we had purchased the property. As of the end of the first quarter, that property was still 100% leased but has come off lease with New Era Networks. We now have that property 26% leased and we are active with three tenants for about 102,000 square feet. If those tenants get signed, that property will be 77% leased.

Collins Crossing is the next property. This is about a 300,000 square foot property in North Dallas. The primary tenant there was Techtronics, formerly Inet. That lease does not expire actually until the end of the second quarter, so it was at the end of the first quarter 100% leased and will be right until the end of the second quarter. There are other tenants there. If we did no further leasing on that property, because Techtronics is leaving, that property would be 28% leased upon the expiration of the Techtronics lease at the end of the second quarter. However, we are working with two tenants there for 140,000 square feet and if those two deals get done, that property would be about 76% leased.

And the last property that I mentioned was 380 Interlocken, which is in the Denver-Boulder corridor in the northwest section of -- submarket of Denver. This property has a law firm, Cooley Godward, whose lease does expire right at the end of 2010, actually 12/31. And this property is about 240,000 square feet. If we did no further leasing and Cooley were to leave, that property would be about 56% occupied at year-end. We are active both with Cooley and another tenant, so two tenants that we are very active with right now, for about 62,000 square feet. If those two deals get done, that property would be 82% leased.

Again, the further out in the year that we are talking about, i.e. the Interlocken property and the Collins property, those leases might not get done this quarter or in the case of Interlocken, even in the next quarter, because they are fourth quarter turns. But the other deals are pretty eminent if they are going to happen and are likely to happen this quarter. I hope that helps and updates a little bit those big deals that we -- big properties that we have been talking about in the past.

Successful leasing of these big lease rolls as well as other vacancies we have during the course of 2010 in our view will position FSP very, very well for 2011, 2012 and 2013 as we have a much more modest lease roll picture in those years and we believe if we can get the leasing done this year, that those years will show meaningful rental income growth going forward.

Moving on to property acquisitions, new property acquisition efforts in the first quarter of 2010 were significant. We have been working on several potential additions to the portfolio, but no new properties were actually purchased in the period. But we anticipate current and future activity to produce additional acquisitions of properties for the FSP portfolio this year. Last year, that is full year 2009, three properties were purchased directly into the FSP portfolio and an interest in a fourth property via an FSP-sponsored syndication was also purchased. The total invested in these four properties was approximately $140 million.

We are currently and very actively working on two different property purchases, both from two different developer sellers that we have done business with before. Both of these properties, if we acquire them, would be acquired substantially below replacement cost. Both of these properties would be acquired at better than 8.5% caps on current in place NOI. The total purchase price of both of these properties, if acquired, would be approximately $90 million and that's fairly evenly split between the two properties. But again, the caveat, there can be no assurance of if we will acquire them or when. We are in active negotiations and due diligence right now on both of them.

We have also a number of other potential acquisitions in some stage of review, but not as far down the pike as the two properties that I mentioned. We have been steady acquirers of additional properties since the financial crisis manifested itself in the second half of 2007. Those who said wait, there will be a flood of great properties to acquire at great pricing, at this point at least, are still waiting. And at least for now, if they aren't waiting and waiting to do some buying, many of those greater properties, they are buying at somewhat lower caps and higher prices than they could have in 2008 and 2009.

Steady disciplined acquisition work at broad cyclical bottoms and steady disposition work at broad cyclical tops in the economy is an FSP view that we believe can enhance rate of return from commercial real estate investing and keep overall returns competitive without the use of excessive leverage. New property acquisitions when completed are anticipated to provide additional accretive rental revenue to the FSP profit picture.

Next, we'll talk a little bit about investment banking. During the first quarter of 2010, our investment banking group completed capital closings totaling only $2.1 million, and consequently, operated at a loss of about $0.5 million or about $0.01 per share. Our investment banking business starts 2010 still constrained, as it was in '08 and '09. And while it has always been very volatile quarter to quarter, historically, the first quarter right through tax season, April 15, has been the slowest period for this business, with September through the year-end period being the strongest. But it has always been a very deal-driven business, a market-driven business regardless of historical time frames.

The bank is currently working on finishing up two separate syndications where the remaining equity as of the end of the first quarter was about $8 million. In anticipation of the completion of these two offerings, we are working on several new potential property acquisitions for future syndications later this year.

The economics of our investment banking business remain about the same as they had been. We've talked about this before, but with about -- it takes about $50 million in equity raise per year for the bank to break even and I think that number is still a good number as we move into 2010 here. Before the 2007 financial crisis occurred, this business would do in excess of $200 million in equity raise per year. Over the last 15 years, we have averaged about 80% repeat investors in our equity syndications and that figure is not only holding true now, but actually over the last couple of years, has actually moved higher, closer to 90% repeat investors.

We now have 14 single asset sponsored REITs that FSP manages for a fee that stand outside the Company. Those single asset REITs have a total syndicated value in excess of $800 million and FSP has an equity or effective first mortgage investment in some of these REITs totaling about $133 million, $92 million of that being an equity investment and about $41 million of that being in mortgage investment. For the full year 2009, our investment banking group raised equity totaling about $40.4 million and we are very optimistic that business for full year 2010 will show an increase over 2009.

So just stepping back from these three business segments for a minute and just trying to summarize maybe some perspective on these three segments as of the end of the first quarter, I definitely think the most important thing that the company is facing is leasing existing space and expiring leases and lease roll. It's time for us to do this. This, as I said, a big hump year for us, a big year for lease roll.

The good news is, the markets are much more active, the leasing markets are much more active. We have a lot working for us. We have a lot of activity at our properties and we have some of our best properties that in fact are incurring the lease roll. We have the money and the flexibility to make any deal we want to with any tenant who wants to occupy space in one of our properties, and we will make deals this year trying to get the best possible return on our cash investment, knowing and understanding that there are extraordinary TI levels out there, particularly to sign long-term big leases with credit tenants. Leasing commissions are high.

But it is a property by property business. It is a market by market decision. And for us, that is lower levered and a cyclical investor, you might see us do some shorter term leases if we can, so as not to encumber a property long-term with some of the very low rents that are out there. We do believe we are close to a bottom here. We do believe the economy is recovering. We do believe that the commercial real estate market is at the bottom or close to it and maybe turning up in a number of markets.

But it will vary from property to property. It will take a lot of cash in 2010 to reload, but we have the cash and we will reload. Again, there is a lot of activity and as an investor in FSP, the number one thing I would watch in 2010 is how we do on the leasing.

On the property acquisition front, property acquisitions for us are still very, very accretive. Pricing is still relatively good, but so far, as I mentioned earlier, I look around and sort of don't know what everybody has been waiting for. For core properties in core markets, stabilized properties in good markets, prices are not going down. If anything, prices are going up. There is money around and properties are starting to trade again. And there are still though sellers and developers who are very, very motivated to sell. We have some deals working and we have good opportunity and visibility on others.

And lastly on investment banking, it certainly doesn't show it in the numbers for the first quarter, but we really believe that the tide is turning here. We are talking to and surveying our investors a lot these days. And our investor group, remember, is 100% internally accessed and serviced by us. We have our own broker dealer. We have never raised money through outside sources or outside broker dealers. But even in the best of times, this business has never been a linear business. It is always volatile and deal-oriented quarter to quarter. Last year, 2009, the total equity we raised last year was about $40 million and almost all of it was in the fourth quarter of last year.

But our investors are expressing more confidence generally in the US economy, generally in commercial real estate, and they are expressing more confidence in us to manage their single asset property investments through this downturn, and expressing more appreciation for our low and no leverage model as compared to many others that have not fared so well and keep making the headlines. There is a tremendous amount of new investable capital that can be triggered by positive results emanating from the future investment performance of some of our 14 single asset REITs that stand outside the company.

As real estate markets begin to stabilize and turn up, those 14 single asset sponsored REITs and their relative investment performance have the potential to provide a lot of future leverage and new investment capital to our investment banking business. With those comments, I would be happy to open it up for questions.

Thank you.

(Operator Instructions)

And our first question will come from the line of Dave AuBuchon with Baird. Please proceed.

Good morning. I appreciate the additional detail, George, you gave on the large asset issues that you have. Curious what the net rents are, just approximation for some of those buildings, particularly the Innsbruck and the Meadow Point assets and then the CapEx cost. You did mention that you could pay for any lease, so just kind of give an idea for what sort of capital expenditures we should be building into our models along with the net rents?

I don't mean to be evasive, Dave, but I will tell you that we are in stages of negotiations with so many tenants that I don't think that would be a wise thing to do right now. When a property is leased, when we complete the leasing of a property, we clearly obviously will give you those numbers.

They vary so much though, that's one of the issues. Length of lease, credit of tenant, you do trade TIs for rental rate. There is so much that goes on there to sort of make a blanket statement is probably not a good idea at this point and I think would not serve us well, because the markets are so competitive out there.

What sort of term do you think will result out of the Innsbruck and the Meadow Point assets?

These are generally five to ten-year terms.

Okay, and these are tenants that are in the market or new or can you provide a little bit more detail behind the profile of the potential tenants?

These would be new tenants to these properties. These are tenants that are in the market, looking at a variety of properties. Ours is one. And at least the information that I gave you on the real active leases are that they have told us they want to be in our property and we are actively working on negotiations on leases with them.

And do you know the depth of competition that you are experiencing with those assets, how many buildings you are competing against?

I don't know absolute numbers, but in virtually all of the markets that I have talked to you about, they are large suburban office markets with just plenty of competition.

Great. Relative to the Greenwood building, you mentioned it is 26% leased now. That entire building was leased to Sybase, correct? Is it 26%, is that subtenants that have already gone direct?

Yes, that is generally the case.

And then the other three tenants, 102,000 square feet that you are working on, is that additional subtenants that you are working or just new tenants to the building?

A combination.

Okay. And then, and again, I know that you are still involved in the negotiation, but generally for the Greenwood and Collins Crossing and Interlocken assets where you have tenants that are in place that may renew, what sort of drop in net rents should we think about? And again, I know you are in negotiation, I know you talked about 10% to 15% generally is what the portfolio is over market. Should we be modeling something greater than that number just for these three assets because of the size and locations of the buildings?

No, I don't think so. I think if you use that 10 to 15%, you will be okay. Again, on any specific deal, it might be better or higher or lower than that. I mean, for example, in our Houston property that we renewed, Citgo was the tenant, we did a 12-year lease and there was no drop in rent. So you go from things like that -- in some properties, you have 30% drops in rent. So they vary so dramatically. But it is also credit of the tenant, length of the lease, TI package, I mean, they sort of all integrate.

The one thing that's really important to -- you need to keep your properties leased. Vacancy is no good in general. But some leases, some landlords that have property-secured debt, if you are facing a refinancing of a property and you are looking at that lender, and that lender is looking at you and saying, I will refinance but I want ten years and I want a credit tenant, and you've got to put that tenant in to cover this debt service, if your option is losing the property versus having vacancy for a little bit longer or doing a shorter term lease for less TI with less of a credit tenant just to move the ball down the field, we call it here sort of reverse ROR. In other words, some of your better RORs, if you believe in a recovering economy, will do better on shorter term leases, we have the flexibility to do that, because we are not facing any of that on any of our properties, because we have no property-secured debt.

And again, a lot of it is science, but some of it is art because you are trying to predict the future. So you look at any property and the difference in rent and the difference in the TI package, depending on the tenant, and I mean for a big space or small space, credit or non-credit can be wildly different. And that's far more the case with us than probably other landlords.

Okay. And then, has the leasing momentum been sort of a slow build over the last quarter or two or have you noticed a more meaningful change over the last couple of months?

Definitely starting in the fourth quarter, but it has been geometric. It has not been linear. There has been lots of activity here in the last quarter and the last six months. We all look at the economic statistics out there and earnings reports and a lot of things. I think a lot of what is happening is just that for basically two years, companies, prospective tenants were just paralyzed. They just weren't going to do anything. They weren't even going to try to do anything. They just didn't know what the horizon looked like. I think now, that has really changed and so the activities there, the ability to compete is there, where it really wasn't the last two years.

Again though, the qualification to it all is, we are not going to get any net net net better numbers in terms of occupancy and rents until we get sustainable employment growth, and that is not yet happening in most of the markets that we're operating in.

Right. And then in regards to your strategy of communicating any changes regarding leasing to the Street, is it just related to this five buildings, any sort of lease that gets done within these five buildings, that's what you'll be communicating to the Street intra-quarter, if it happens?

We'll definitely do these five buildings, Dave. But we would view adding some others to that as well, other leasing. We've got several other pretty good-sized holes in the portfolio and we are very active on those too. So those would be included.

Okay. You mentioned that you bought four assets last year. Three, I believe, were within the REIT, the wholly-owned portfolio. The fourth asset, that was bought with proceeds that were raised from the syndicate side?

That was a property in Kansas City called Grand Boulevard.

Okay, Grand Boulevard.

We've syndicated the vast majority of equity on that with outside investors and then FSP purchased approximately a $15 million interest in that syndication in that property.

Okay, and so then how much of the $40 million that was raised in Q4 has been invested? Of the syndicate proceeds?

That's all been invested.

That's all been invested, okay. And then my last question is related to the two deals that you are closer to the finish line on. Are those assets that you are going to purchase from the private REIT?

Right now, the view is that those assets would be taken directly into the Company.

Right, I am sorry, I meant, is those assets from the pool of private REITs that you have, you are already managing right now? Or is it separate from -- are they completely third party deals?

Ask the question one more time, Dave. I just want to make sure I got what you are asking me.

So the private REITs that you manage right now, are the deals that you are contemplating taking into the REIT, is that from that pipeline or is it from a completely different area?

Completely different, no, no. These have nothing to do with the single asset REITs.

Perfect. Thank you.

And our next question will come from the line of John Guinee with Stifel Nicholaus. Please proceed.

Great, thank you. Well, George, you guys look awfully smart for buying in 2009, because no matter who we talk to, people say that prices went up 15% to 20% in the last three or four months, so congratulations. Are the two acquisitions that you have now, are they under contract, in due diligence or are they under LOI?

They are not under purchase and sale agreement. They are just in active negotiations, again, with developer sellers that we have done business with before.

Okay. In terms of, I guess, John, in terms of your deferred leasing commissions, which show up here at about $5.5 million or $5.6 million, is that a cash number and how should we think about that going forward?

That's primarily from the Citgo lease that we signed, I believe it was in January, John. And that was an existing lease in the portfolio, but we paid a commission to get the extra term on that when we signed it. But it was cash that went out the door and will be amortized over the new term of the lease that we sign with them.

Okay. Essentially by our numbers, Jennifer is here with me, takes you down to [FAD] of about $0.09 or $0.10 for this quarter. Is that the kind of number we think we'll expect for the rest of the year? Just reading between the lines, it looks like you ought to run your FFO assuming no equity raise, assuming no acquisitions, at $0.19, $0.20 a share for the rest of the year. Do we expect FAD to come in near the dividend at $0.19 or do we expect FAD to come in closer to where it came in this quarter at $0.09 or $0.10?

Well, I think what happened in the first quarter was a bit of an aberration when you look at what we did with Citgo. I think it is really difficult to predict what it is going to be as we move ahead. I think you have to kind of look at the sort of one-off what that lease extension was. That was a term of what, 12-year additional term with Citgo and there is -- so I wouldn't annualize that or anything.

Okay. And then you were very upfront about modeling at 10% to 15% gross rent roll down, I am assuming. And then you've got about 18% vacancy now, 12% more rolling through the rest of the year, Ober Kaler rolling out in first quarter of '11. Where do you think you'll bottom tick on occupancy or top tick on vacancy and which quarter would that be?

This is George, John. The honest answer is we don't know, of course, because we don't know what of these leases that we have working will get signed. If we got signed the level of leasing activity, good activity that we have going, we would be up ticking in occupancy between now and year-end, not down ticking, because the net is an up tick. From quarter to quarter, I can't tell you, because from quarter to quarter, it could vary. But our view is that we will finish the year at much higher occupancy than we are now.

Okay, good, good. And then just very briefly on your sources and uses page, I guess the cash went down despite no acquisition because of that big lease commission. Why did the related party mortgage receivable go up from 36 to 41?

Well, we had some additional lending on the single asset REIT loans.

Okay, okay, and then, can you--

Primarily the construction project going on at 385.

Okay, and what's the status of 385 in terms of, has it topped out, have you got your C of O, have you had any leasing done yet on that?

John, it's George. That is actually still an active Reg D equity offering. We actually still have about $5 million to complete the equity on that. So I can't and shouldn't talk about it in too much detail. But that property is pretty much on target, on budget. We are topped out, we are completely enclosed in. It will be completed this summer. We have started leasing, we got some leasing done. And the market, the submarket that that property is in, talk to anybody who sort of knows the Denver-Boulder submarket and in particular, the Interlocken office park in that market. It's a fairly small market and so vacancies and so on can move around fairly fast.

But as of the end of the first quarter, according to CB Richard Ellis, there was only about 6% vacancy in Class A space and this is a Class A building. And there were really no big areas of space to lease. We were sort of it. When we did that syndication and started that property, it's a long story, but one that is consistent with other development activities we have done in the past and what we again may do in the future. We did that building on spec and of course, everybody sort of scratched their head as you were doing that right at the beginning of obviously a significant downturn.

But as we come to finish on that building, we are pretty much the only game in town. And there is a lot of interest in that property at very good rental levels that we have pro forma-ed. We feel very, very secure as a construction lender in that transaction because of the property, the leasing that is going on and the amount of equity that's in the deal.

Okay. So your investment right now is as construction lender and you are actively trying to syndicate that out?

Syndicate the balance of the equity out.

Got you, okay. And then equity and earnings of non-consolidated REITs a year ago was $792,000, slowly drifting down, it looks like you are under $300,000 this quarter. Is this something that is going to continue to slide or you see this up ticking a bit?

It's property by property. Biggest property there is for us that we're affected with is 203 East Wacker in Chicago. The Chicago market is still pretty weak and that will be a tough slug. But again, when we're looking at our individual single asset REITs and our investment in them, our fiduciary responsibility are to those shareholders and those REITs. Obviously we are one. And those REITs really don't have the ability to access funds from the pool that obviously the FSP properties do, because they are not part of the company, not part of the line of credit, not part of the term loan, et cetera.

And so many times in those single asset REITs, we do husband cash flows and dividends to make sure that we have plenty of reserves to do leasing, particularly in down markets like this, where in the FSP portfolio, we know we have access broadly speaking to the line of credit and the term loan and so on and public equity markets, for that matter. So those single asset REITs do operate within themselves. And again, where we get our income from those is from dividends and in times like this, we pay out many times minimum dividends under REIT rules so we can maintain cash within those single asset REITs to do the leasing work that needs to get done in this market.

Okay, well, thank you. That's all my questions.

Thanks, John.

Ladies and gentlemen, this concludes our question-and-answer portion of today's call. I would like to turn the call back over to Mr. George Carter, Chairman and CEO, for closing remarks.

I would just like to thank you all again for tuning into the call. This is an exciting time for FSP. I think the markets are exciting. And I think like everybody else around here, we have the champagne in the refrigerator, but don't want to pop the cork yet. I think there still are structural issues that our country will face and for that matter, the global economies will face and I don't know how they will affect things. But right now on the ground in our markets, things are definitely improving. They are definitely more active and we are very positive. I hope to see some of you at REIT Week in Chicago, June 9, 10, and 11. Thank you very much.

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