Franklin Street Properties Corp (FSP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Franklin Street Properties Earnings Conference Call. My name is Stacy and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

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

Thank you, and good morning, everyone. Thanks for joining us for our Q2 earnings call this morning. With me are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; and Jeff Carter, our Director of Acquisitions.

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, August 4, 2010. 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. John?

Thank you, Scott. Welcome to our earnings call. We're going to be talking with you about our second quarter results, and we'll start with a short overview. Afterward, George Carter, our CEO, will further discuss our second quarter of 2010 and FSP.

I'm going to be brief, and we'll be referring to our earnings release, the supplemental package and 10-Q that were filed last night. I'd like to start with the balance sheet, which continues to serve us well and will enable growth as we move ahead. As of June 30th, we had cash of $21.5 million and $87 million in availability on our line. This totals about $108.5 million liquidity to help operate FSP and fuel future growth.

Our property portfolio was 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's not right for it. Since our debt is unsecured, it's viewed more like one property, and can act to mitigate this risk.

Geographic diversification spreads out local economic risk across our 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 affords our shareholders a significant and more conservative equity investment in our real estate. Our interest rate coverage ratio is very high compared to our peers, at about ten times for the first half. And we finished the quarter with our leverage ratio at about 20%.

As of June 30th, we had $238 million in unsecured debt outstanding, and shareholders' equity of $919 million. Our shareholders' equity is held by our common shares only, as we don't have any preferred shares or other types of equity instruments. The $238 million in debt consists of our line of credit balance of about $163 million and an unsecured term loan of $75 million. The line matures in August of 2011, and our term loan can be extended to October of 2013.

With the line of credit maturity about a year away, we have been talking with banks in the bank group and others about the credit markets. We think the credit market has improved, and spreads have been coming in. This may make it a good environment for a deal, increasing our line of credit availability or floating rate debt, and adding a fixed rate debt component to our capital structure. We haven't started negotiations, but we're very optimistic about the credit markets from what we've learned.

I think our leverage ratio and the balance sheet paints a solid picture of FSP, and we stand as a very good credit at a time when there is some uncertainty in our economy. We may see some challenges with leasing and investment banking as we continue to move through this part of the cycle, but 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 the 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 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 second quarter and first half of 2010, we did not sell any properties, so we did not achieve any gains on sale. This is because the sale of properties in this part of the cycle in this market generally didn't make sense to us, in our opinion, though in some areas we have seen pricing firm up.

Second, our investment banking profits continue to be impacted by the lack of improving office property fundamentals in this economy. However, we were able to close the last two syndications we had outstanding. George is going to be talking more about that later.

Investment banking profits come from fees we earn on the value of shares that 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 from G&A and related income taxes.

During the first quarter -- I'm sorry, second quarter, we achieved $8.4 million in gross syndication proceeds, compared to about $375,000 in the second quarter of 2009. Although that is an improvement over last year, we continue to find the environment choppy and difficult to predict from quarter to quarter. We measure performance of our real estate operations and investment banking by FFO, which for the second quarter was $16.7 million, or $0.21 per share, which is the same as the first quarter.

Comparing the second quarter of 2010 to the second quarter of 2009, FFO was down about $0.7 million, or $0.04 a share. The decrease was primarily from performance in our real estate segment of about $1.3 million, which was offset by an increase in contribution from our investment banking unit of about $0.6 million.

Of the $1.3 million real estate FFO decrease, $1.1 million was primarily a result of decreased occupancy in the real estate portfolio in the second quarter of 2010 compared to 2009. The remaining $200,000 was essentially a decrease in distributions received from investments in some of our non-consolidated REITs. The investment banking FFO for the quarter was up about $600,000 in Q2 -- Q2 2010 compared to 2009, as a result of the increase in gross syndication proceeds that I mentioned a minute ago.

That covers our financial performance. The earnings release, supplemental and 10-Q filing go into further detail about our results. 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, and thank you for tuning into the call. I will as usual follow my written comments in the earnings release sort of paragraph by paragraph, trying to fill in a little bit on each one of those topics.

As John said, our second quarter profits were sequentially flat with the first quarter at about $0.21 per share. Our profits for 2010, as we've been saying, really are going to revolve around the interplay of three major factors. One is the leasing of our existing portfolio. 2010 is a big lease roll year for FSP, obviously in a real tough market. And how well we do on that leasing will make a real big difference.

Our lease roll really started sort of in the fourth quarter of '09 and will go through the first quarter of '11. 2010 will be the full year of heavy lease roll. We had, up until the fourth quarter of '09, been pretty much 90%-plus occupied, and are, again, fighting this lease roll in a tough market right now and trying to keep people updated on how we're doing there.

Leasing will interplay with the second factor, which is acquisitions. Acquisitions tend to be for us, in our structure and what we're trying to acquire, accretive to profits. And so you have acquisitions being, on the one hand, somewhat accretive to profits, and leasing with the lease roll-downs and vacancies being dilutive to profits.

And the third factor is our investment banking group which has transactional profits associated with it, and which, from any quarter to quarter, can be radically up or down in terms of its profitability. So, it's the interplay of those three that really determine what 2010 will look like.

I have been saying that our profit results for 2010 potentially have a lot of variability. And of course, after saying that, first quarter to second quarter was flat. But I still would say we have a lot of potential variability when you interplay those three factors that I've just talked about.

And I will go into a little bit more detail on each one of those now. Regarding our real estate portfolio and leasing, our occupancy at the end of the second quarter was about flat with the first quarter at about 85%. We are calling 2010 internally sort of our hump year with the big lease roll.

And I will tell you that, on the ground, the fundamentals for suburban office, which is our primary product type, are still poor, but definitely stabilizing. In most markets that we're in and I think probably most markets around the country, suburban office is posting direct vacancy of 15% to 18%. If you throw in sublease, you're up around the 20% level.

We've seen those kinds of numbers basically in our markets. You have very little pricing power. The tenants are pretty much in control with their tenant reps. And as I have said before, and most everyone agrees, we will need really sustained employment growth to see meaningful and sustained change in office fundamentals on the ground.

I would add that in quarter two we did see, are seeing, sort of a mild slowdown in the activity level that had generally picked up in the second half of '09 and really sort of in the first quarter of 2010. And when I talk about activity level, I mean just number of tenants out seriously looking for space with their tenant reps.

And I don't know whether this is just summer doldrums type of stuff or whether or not some of the recent data that we all have been seeing relative to -- sort of macroeconomic data relative to the economy slowing down a bit -- is in fact spilling over to the leasing market.

You know, the fall will probably tell us all whether this is just a little bit of a pause or whether there's something bigger going on. Our view internally is that we are more likely to have growth, whether slow or faster, it can be debated, but that growth is the most likely scenario.

Our view internally is that the risk of a double-dip recession is not likely, but definitely a possibility. And if you wanted to ask me a percentage, the consensus here is maybe about a 20% possibility. You have to think about it, you have to plan for it, but it's not what we believe is the most likely scenario.

I started this year by talking specifically about a few properties. These were just the properties that had big lease roll in 2010. And there were fairly big holes, and I'll just give you a little bit of an update.

And for those of you that have the earnings release, we included in this earnings release the same table that we had in our press release of July 8th, which showed the leased percentage of our properties between the first quarter and the second quarter. And I'll sort of be referring to that, just giving you a little bit of an update on some of these properties, and some perspective on them. So if you have that in front of you, it may be helpful.

The first property I'll talk about, which is number seven on the list of our 33 properties, is Meadow Point. This is the property that's in Chantilly, Northern Virginia, the Greater Washington, DC area. This was the property that had as its major tenant for most of the space, CACI, which completely vacated the space. This is about 138,000, 139,000 square-foot office building -- mid-rise office building.

As of the end of the first quarter, it was about 51.5% leased. As of the end of the second quarter, we moved that up to about 80.6% leased. We did do a 16,451 square-foot lease with Booz Allen, just in early July. That property is now 92.5% leased. We are actively working on another 7,000 square-foot lease. And if that gets signed, which we believe it will, that'll pretty much bring that property back up to 100%. And if you sort of look at that cycle of a nine to probably ten-month re-lease, that probably won't be atypical of a lot of the properties that we're rolling this year.

The next property that I talked about was Addison Circle. This is in Addison, Texas, North Dallas. This is a 294,000 square-foot office building. The main tenant there had been for years Staubach, the real estate company, who merged with Jones Lang LaSalle and, as a consequence of that merger, has left the property. As of the end of the first quarter, that property was 61.3% leased.

We did some leasing, about 92,000 square feet, and as of the end of the second quarter that is 92.7% leased. That property has always had good activity, continues to have good activity, and we've gotten through that roll-down in that property pretty well. We're happy with our success on both Meadow Point and Addison.

The next property is Collins Crossing, sort of number 15 on the list of our properties. That's in Richardson, Texas, again, North Dallas; almost 300,000 square feet. It's a big property. The main tenant there was Tektronix. Again, there were some mergers there, and Tektronix left the property; they occupied a lot of it. And Collins Crossing is really the last property that has a big drop or big lease roll in it this year.

So, this is the one that's really landed on our head at the start of the third quarter. Again, we knew this was coming. So as of the end of the second quarter, you'll see Collins Crossing 100% leased. Tektronix has now left at the start of the third quarter. That property is currently 28.8% leased.

The good news though is we do have a non-binding LOI, and we are actively working on a lease with a tenant for 85,000 square feet. We are pretty confident that we'll get this lease done. And that would move that property up to about 47% leased if that lease gets done. And there's other activity in that market and other groups looking at the property. Collins is a wonderful property, and again, we're very confident we will move through the leasing on Collins.

The next property is Greenwood Plaza, it's number 16 on the list. This was the New Era Networks/Sybase property located in Englewood, Colorado. That's the Denver area. That's about a 200,000 square-foot property. That's been somewhat of a disappointment for the quarter. That had been 100% leased to New Era Networks or Sybase, who had subleased a lot of that property to a variety of different tenants.

We kept some of those tenants that we could move the rents up to where we thought it made sense. But in fact, in the final analysis, a lot of those tenants did not want to pay the rents that we thought made sense for the property. It's in a fairly good submarket within that Denver area, the southeast Denver area, sort of midway between the Tech Center in the southeast area, if you know Denver. It's right at a transit-oriented development site. And we really think we can do better in rents there.

That property then -- so that property went from 100% occupied at the end of the first quarter to 30.6% occupied as of the end of the second quarter. There was a holdover tenant for 16,900 square feet, which has now left. So as we speak today, that property is 22.1% occupied -- the bad news, and a disappointment; we thought we could do better with some of those sub tenants.

However, the good news is, that submarket, as I said, is real solid and we have some very unique space and size space in that submarket. So for a 200,000 square-foot property, we actually have four prospects right now that we're active with -- and we don't have any LOIs or any leases yet -- totaling 370,000 square feet. So we are very optimistic that we will get that property released at better rents than we would have done with the sub-tenants.

The biggest disappointment of the quarter -- and just awful here -- is the Innsbrook property. That's number 19 on the list. That's the Land America property that took the bankruptcy late last year, located in Glen Allen, which is the Richmond, Virginia area. We had a non-binding LOI on that property. We really thought we were going to execute that lease. It looked very good. And that would have almost leased the entire property. We lost that lease. In fact, it really shows the power of the tenant in the marketplace. They do bid you off. We're certainly not naïve to that. In fact, a couple of other parties had run-ins with this particular tenant, getting bid off, and they're certainly not a well-regarded tenant within the real estate market, but I'm sure their shareholders regard them well.

Anyway, that property is currently 31.3% leased. It dropped from 34.7% at the end of the first quarter to 31.3%, and at the end of the second quarter is currently 31.3% leased. Again, the good news is there, we have a lot of activity, a number of prospects there, with size of interest anywhere between 10,000 and 100,000 square feet. So, we're very hopeful we'll get that property back up and going here shortly.

The last property that I'd mentioned was number 20 on the list, which is 380 Interlocken. This is in Broomfield, in Denver/Boulder Corridor. This is about a 240,000 square-foot property. The larger tenant there was a law firm, Cooley Godward. We've got Cooley re-signed. They downsized by about 11,000 square feet, but we have prospects for that. So that property has moved from 87% leased as of the end of the quarter to 89%, almost 90% leased at the end of the second quarter.

And when you look back at these properties and the portfolio, you're now really looking -- with Collins Crossing having Tektronix leave -- you're now sort of really looking at the big holes for 2010. And the three big properties that remain, that if we can do leasing on for the balance of the year will really make a difference in profits, are Collins Crossing, the North Dallas property; Greenwood Plaza, a Denver property; and Innsbrook, the Richmond property. The good news is, we have a lot of activity on all those and we feel very confident we'll get them leased.

Just one last comment overall on the leasing and occupancy, because people have asked in Chicago and other places at investor conferences our feelings on the portfolio. We are getting through the leasing. There is a lot of small leasing and small vacancy that we're not talking about that is getting done at the same time as we're talking about these big properties.

Holding our occupancies where they've been and doing the work that we've done make us feel more confident than ever, that we will get through 2010 and get back in the 90% occupied level in 2011 and be -- again, other things being equal -- be able to stay there. But it is painful going through the lease roll that we're experiencing.

Moving on to acquisitions, we did do an acquisition in the second quarter. And I will let Jeff Carter, who's our Director of Acquisitions, describe that.

Thank you, George. I will give a brief narrative on our recent acquisition of the TCF Tower and Bank Building in Downtown Minneapolis. We were attracted to this investment because we saw it as an opportunity to acquire an urban in-fill property in the land-constrained central business district of Downtown Minneapolis at a significant discount to replacement cost, and at an A location. At $40.5 million, with approximately 470,00 total rentable square feet, the price per square foot translates into approximately $85 a foot.

The property was approximately 90% leased with just over 50% of the total property leased to TCF National Bank, and the remainder of lease space occupied by a healthy mix of over 40 tenants in diverse industries and with varied expirations. This property was acquired at an in-place cap rate of approximately 8.8%, and with pending expansion plans, if successfully finalized, should stabilize in year one at an approximate 9.1 cap rate.

The property is comprised of two adjacent and connected office buildings. Building one is known as TCF Tower, and consists of a 17-story class B office tower containing approximately 300,000 rentable feet, located at 121 South 8th Street in Downtown Minneapolis.

The tower portion of the asset, which consists of floors six through 17, was completed in 1981, while the five-story parking ramp, floors one through five, that it sits on, was completed in 1973, and contains over 200 parking spaces. The property was approximately 85% leased at the time of acquisition.

The largest tenant in the Tower is TCF National Bank, with approximately 30% of the space. Proposed expansion plans of an additional approximately 11,000 square feet, if successfully finalized, are in the works.

Building two is known as the TCF Bank Building, and it consists of a four-story, class B office building, containing approximately 170,000 rentable square feet, located at 801 Marquette Avenue South, also in Downtown Minneapolis, and again, connected to the TCF Tower. The TCF Bank Building was constructed in two phases, with phase one completed in 1923 and phase two completed in 1943. This property was approximately 98% leased at the time of acquisition to TCF National Bank.

One feature unique to the older four-story TCF Bank Building and its potential future is the possibility of development or redevelopment on the site. In fact, Ryan Properties, the seller, and the developer of many downtown properties including 50 South 10th Street, one of our sponsored REITs and our manager there, who is also headquartered there, commissioned an initial architectural review of the site from a nationally-recognized firm and determined that a 600,000 to 800,000 square-foot tower could be built on this bank building site. FSP views this potential for redevelopment of the Bank Building as a key driver in the decision to acquire the property.

Should conditions and circumstances arise that prove favorable for redevelopment, FSP will be poised with arguably one of the best remaining sites in the city for tower development. The site is nearly adjacent and diagonal to the landmark IDS Tower, and nearly in the center of Downtown Minneapolis within approximately one block of the pedestrian-friendly Nicollet Mall.

The site is also physically connected to the landmark Foshay Tower, which has now been redeveloped as a W Hotel with a Manny's Steakhouse in the lobby, and possesses several key skyway links. Should conditions prove unfavorable for redevelopment in the intermediate term, then continuing to operate the property in its current form should continue to provide steady and competitive rental income.

Thank you.

Thanks, Jeff. The Minneapolis property, this $40.5 million acquisition, really in our minds finishes up the September offering -- share offering that we completed for about $115 million. We have -- while all money is fungible, and it moves through the system in various ways -- we have made the decision to acquire during this cyclical downturn and to, at times, use equity to help us in that acquisition process, so that our debt levels do not get too high.

That offering we did last September was the first offering that we'd ever gone to the public equity markets for. And again, we had designated that approximately $115 million that we raised during that offering for acquisitions. We acquired almost immediately after the offering the $73 million acquisition in Falls Church, North Virginia, just inside the Beltway. And we had our eyes really on several other properties that we thought likely acquisition candidates.

But if you remember, back really sort of second half, fourth quarter of 2009, prices started to move; money came off the sidelines; cap rates compressed somewhat. And we lost some of those deals that we thought would acquire against the balance of that offering to higher bidders. We kept our discipline.

The offering effectively was somewhat dilutive as you moved, up until the Minneapolis acquisition. Because we acquired the Minneapolis property right at the end of the second quarter, its contribution to rental income will really not be seen until the third quarter. But we now have completed, again, in our minds, the way we look at that equity raise, the acquisition of properties with that capital.

Some of you may have noticed that prior to the start of the second quarter, we had also put in an at-the-market program, an ATM program for $75 million. During the second quarter we did not use any of that ATM offering abilities, and so did nothing under the ATM in the second quarter. Again, the ATM and any other equity-raising activity, again in our minds, would be for acquisitions. And the only acquisition we did in the second quarter was Minneapolis, which, again, finished up the offering in September.

We did -- relative to the Falls Church acquisition -- we did back when we completed the September offering -- there is some exciting news. Some of you who know those markets know that Northrop Grumman Corporation has decided to move their corporate headquarters from Los Angeles to Falls Church, and actually in our office park, which is called the Fairview Office Park -- again, right inside the Beltway.

They're actually going to buy a building there and have it as their corporate headquarters. And the Department of Defense, the TRICARE Joint Medical Command Unit, is also going to move a large facility to a building that just is almost part of the park -- it is just right adjacent to the park -- for a lot of space.

These kinds of tenants attract clusters of vendors, which we think will become a huge and expanding tenant market in that park. Prices of properties, in Northern Virginia in general, but specifically in that little submarket, have risen dramatically since bought Falls Church, and there's been quite a bit of cap rate compression. So, it's exciting to have gotten in when we got in.

One of the reasons I wanted Jeff to talk a little bit about the Minneapolis acquisition maybe more than others is because Minneapolis is an example of sort of a new character of acquisition focus that we're going to be moving to. During '08 and '09 when the bottom of the market really could not be felt and we were still going down and there was a lot of uncertainty, FSP did acquisitions primarily with longer-term credit tenant leases, triple net leases.

We did Monsanto in St. Louis; [C.H. Robertson] outside of Minneapolis; and Northrop Grumman in Chantilly, Northern Virginia; Noblis in Falls Church. And we were able to acquire those income streams, longer term income streams at pretty good caps -- you now, 8.5 to 9 caps, good prices per square foot. That market has moved away now, and has repriced cap rates compressed pretty dramatically from where we purchased them.

We think the better opportunity, the better IRRs right now, are in more of the Minneapolis type of acquisition; that is, multi-tenant, definitely some value-add to the equation, whether it's future development and/or within the property.

And so, I think Minneapolis will represent more of a property type for acquisition going forward. Again, it's where the market's taking us in the cycle. And as we acquire other properties, and we plan to make other acquisitions this year, we will continue to announce those acquisitions, as we do them, in press releases.

Moving on to investment banking, during the second quarter of 2010 our banking group placed approximately $8.4 million of equity in two different private placement syndications. Both of these offerings are now fully subscribed and closed. There are currently no private placement real estate investment offerings that are open. Our investment banking group operated at about break even for the quarter, generating net income of approximately $263,000.

Several times over the past few earnings calls or meetings elsewhere, I've been asked about 385 Interlocken, which is a syndication that we had still active under Reg D private placement rules. And you have to walk a fine line in terms of talking about an offering under Reg D that is still open. But it is the largest loan to one of our syndicated REITs -- we call sponsored REITs -- that we have made.

And so, I'll just give you a little update on that property, because I can do it now since the offering is completely finished. This property is in the Denver/Boulder Corridor in an office park called Interlocken. It is next to two properties that we own in the portfolio -- 380 and 390. This is an 11-story spec building that we built. This is an A-plus building, Gold LEED-certified, really the state-of-the-art building in the marketplace. It's about 300,000 square feet.

The developer who is our general contractor there is the developer who built 380 and 390, the two properties that we own, and who is also our on-site manager of those two properties -- a local, very respected developer, Prime West. The construction loan that we've agreed to give to that endeavor is $42 million construction loan. And the equity we raised in the syndication was $38 million. And that equity now has all been raised on syndication is closed.

The property was basically just completed, or is completing right now -- will be completed within the next few days, pretty much. Just finishing up some lobby work right now. And we have done three leases at that property with three different tenants totaling 52% of the square footage. So we are off and running at 385 Interlocken. That little submarket between Denver and Boulder is pretty tight for Class A space.

We have interest in the balance of the space and are very, very optimistic about finishing the leasing on that property. We have an objective with that syndication that once the property is leased to sell and/or put a third party permanent loan or take out of FSP's construction loan on that property. It is not FSP's intention to put a permanent loan on that property.

When we raised the $38 million of equity against the $42 million construction loan, our projections gave us a lot of leeway, a lot of equity for lease up, and a lot of time to complete construction and to complete lease up. Again, construction's basically completed. Lease up has begun. And we feel very, very positive about that property, and obviously the security of our loan.

We believe that generally speaking, investor demand for our real estate syndicated single assets is slowly improving. But it is still erratic. And we are working on some interesting opportunities for syndication. However, we do not at present have any property ready for syndication.

Just touching quickly on property sales, since the beginning of the whole cyclical downturn in late 2007, right up and through the current period of second quarter of 2010, we have listed none of our properties for sale. But we are noticing, as I'm sure everyone is, that there is definitely some interesting activity and pricing and liquidity for certain types of property in certain markets and it is not going unnoticed.

So the GOS or gain on sales seems like a lost metric for us in the last few years. But it may be close on some properties, to coming back. But it does illustrate the whole cyclical nature of the real estate asset class, and our effort to cyclically position through acquisitions in the down part of the cycle and sales in the up part of the cycle. It really continues to be our objective to be active sellers in the up part of the real estate cycle. It is an important element of return for FSP in our lower-levered model.

In closing my prepared comments on the second quarter, I would like to just summarize by saying that we believe that 2010 will be the low point in this economic cycle for FSP profits. One big caveat to that -- that is barring a double-dip recession or something out of the blue, et cetera.

And our belief that this is the low is really based upon FSP's own structural characteristics, and based on our belief that the economy, employment, and the fundamentals of suburban office space are in a bottoming process, and should start to improve by next year.

We have been conservatively positioning an ever-growing portfolio of properties during this downturn, using the strength of our balance sheet and some public equity for disciplined, well-timed new investments, while dealing with a large lease roll period in the existing portfolio in a very tentative investment banking environment. We feel we are on target in executing our cyclical positioning plan for future profit and dividend growth as the economy and the employment picture begin to slowly improve.

That ends our prepared remarks, and I'd be happy to open it up for questions.

(Operator Instructions)

Your first question comes from the line of Dave Aubuchon. Please, proceed.

Thank you. George, can you state what the actual economic occupancy is of the portfolio as of the second quarter end? So if you're 85.3% -- and recognize that you went through in pretty thorough detail some of the leasing movement post quarter end -- but just as of Q2 end, that 85.3%, how much of that is actually rent paying at the moment?

I don't have that accurate number in front of me, Dave. I will get it. I'm sorry. I don't have it.

Okay. Second question is, relative --. Can you disclose the rents that you're getting or the rents that you would anticipate getting at the 385 Interlocken development? Just trying to get a sense of how close you are in terms of getting your investment back in that building, just given today's current financing environment.

Dave, this is Jeff Carter. We had generally looked in our pro forma, depending on lower versus upper floors of rents in the $19 to $21 triple net range, hoping obviously to do even better than that. But that was our rough pro forma. And, in general, we're at or near our pro forma.

Okay. And then just generally, maybe initial discussions that you're having, if any, with banks regarding putting permanent financing on that building, what sort of loan-to-values and/or debt yields are you seeing in the market today?

This is John Demeritt, Dave. We haven't actually started working with banks to take that construction loan out yet, so I don't really have any current market information on it.

But in talking with banks for FSP's purposes, we have seen all-in rates in the sixes from some of the banks that we have talked to, and some of the secured lending has been a little bit south of that, particularly with life insurance companies. So, that's probably in the range of where that might be.

Dave, we have talked to a couple of insurance companies, one in particular, and actually run 385 up the flagpole a bit. Generally speaking, new properties, loan to values of 50% to 60%, are getting some pretty eye-popping rates right now -- low rates. They were even talking the other night about sub fives for that kind of loan to value. Again, on a new property, these are on average ten-year leases with good credit tenants type thing, multi-tenant.

So, right now the insurance companies in particular -- those premiums keep coming in, and they are looking for quality, longer-term investments. And I think -- what they're telling us is that it is a relative game. And if you look at treasuries and all the other options they have, it's that relative spread. And so, I think money is available there at very, very good rates.

Okay. And then --

You've got to finish the leasing first, obviously.

Right. And I think you mentioned that you -- maybe I'm splitting hairs a little bit, but you sounded a bit more positive about your outlook for that particular building versus some of your others. Sort of what pool of tenants are you looking for to balance out, to lease the balance of that space?

The market in Denver/Boulder is primarily a tech and energy market, and then the servicers of both the energy and tech companies. So, you have a law firm that services them, or --. But Conoco Phillips is building, rebuilding a huge campus in that market. You are sandwiched a little closer to Boulder than you are to Denver.

But with the university in Boulder, and things that are happening in California, and the whole government infrastructure of alternative energy, and School of Mines, et cetera, that exist in Golden, Colorado and some other parts of that area, we are seeing a real influx of energy and tech energy and alternative energy as well as traditional technology companies moving into that area.

Again, occupancies -- we don't have final statistics yet for the quarter -- but occupancy or vacancy in Class A space in that market has been sub 8% for a couple of quarters now. So, it's a pretty tight market and we have a lot of interest.

Okay. And so, and then you're delivering the building this quarter. What's your pro forma sort of lease up, your stabilization?

We believe that there's a possibility to be fully leased by year end. Now, we take it one step at a time. There's a lot of interest. The upper floors are the floors that we still have available. So we have some of the best space to lease. And rather than say anymore, we are in some active negotiations. I'd rather just -- I'd rather leave it at that.

One of the things that, to give you some perspective of the loan which is, from an FSP point of view, what counts, is when we did our original pro forma of the equity to loan, we had some three full years to build and lease the property. We're about a year and a half into that program right now, and we're 52% leased.

Okay. Last question is just, John, regarding the -- your just sort of investigation into renegotiating the line. What sort of parameters can you put on the size of what you're sort of looking for going forward, when you include the line of credit plus any sort of term loans that you may sort of execute?

Well, I think we've talked before about roughly wanting to double the size of our line of credit or double the availability of what we could use in our capital structure. We talked about a variety of different things. Again, we haven't started negotiations, so none of this formal.

But there's possibility of increasing the line of credit to the $300 million range with some accordion features to get us up to $500 million when the term loan closes out. That's a possibility. There's also a possibility of floating some private placement debt with the firm, perhaps one of the bank groups, perhaps not. So augment that, and set up a loan to value in a bank loan that sort of will enable that.

So that's just a little bit of color on what we're thinking about, talking about. And we've sort of evolved to this from talking with people in the market over the last few months. And we're going to do that in September, and in the fourth quarter to see how the market's changed and the appetite for that's changed.

But the idea of maybe getting a fixed rate debt component in with longer term to it -- you know, six, eight, ten-year unsecured debt that we could fix as part of our capital structure.

And just to be clear, that debt would be on top of the $500 million sort of capacity that you could potentially have?

I think it would be part of it.

Part of it?

As the Company grows, --there's going to still be a loan-to-value component that'll drive the whole thing, because clearly, you know, we don't want to be a highly-levered REIT. There'd be a max loan-to-value that we would have. So maybe part of it until we get large enough that it could be in addition to it. You follow what I mean?

Right, exactly. Okay, thank you.

Your next question comes from the line of John Guinee with Stifel Nicolaus. Please proceed.

Oh, hi. John Guinee here. Just to make sure we understand it, on 385 Interlocken, is the total pro forma budget $80 million -- $42 million for a construction loan and $38 million for equity raised? Or, is some of that equity raised paying down a construction loan?

Some of the equity raised services the construction loan, which is an interest-only loan.

So what is the -- at the end of the day, you hit 95% or 100% leased and occupied -- what's the total investment basis, debt plus equity, in the asset?

Well, we'll see when the TIs and leasing commissions get finally tallied, after we lease the balance of the space. Again, we've raised equity, which we believe will have a substantial reserve in it after we finish the leasing. But if you get a certain type of tenant that wants a higher TI and a longer lease, that's going to change those numbers, John. So we just can't pin them down right now.

Give me a range. I mean, is the total basis on 385 Interlocken $70 million, $80 million or $90 million, assuming a $40, $50 a square foot TI budget?

It's about $80 million.

Okay. So essentially, kind of like back of the envelope is $80 million at $300 bucks -- 300,000 square feet -- is $267 a foot to build, $20 net rents?

Yes.

Okay. Got you. All right. And then, within your mortgage notes receivable that climbed up to around $45 million or so, how much of that is Interlocken and how much of that is other loans?

This is John. $31 million of the $46 million on the balance sheet at the end of June relates to the 385 Interlocken loan.

How much, again?

$31 million.

Okay.

It's actually on page 12 of the 10-Q. But just, I'll talk about that for a minute. We have $85.8 million in total amount of loans outstanding, and $46 million drawn at the end of June. $42 million of that $85 million is the 385 Interlocken loan, of which $31 million is drawn.

And as we were talking earlier, we may take that out with a bank financing or life insurance financing when we get some more leasing done. So that's a good chunk of it. The rest of the loans, to the single-asset REITs, are much smaller. And they're more related to just TI work and some of the leasing going on at those single-asset REITs.

Okay. And then just looking at your 85.3% occupied now, no move-outs, what George explained -- will you bottom tick on occupancy at 80%, 82%? What's a good percentage occupancy to model in for the portfolio? 80% or 82% -- I'm sorry.

Yes, no, John, I don't know. That's as good a guess as any, really. I mean, if you said guess, that's as good a guess as any.

Okay. And then there --

But I don't know.

Just, there seems to be a slight decrease in your investment in non-consolidated REITs quarter over quarter. You've gone from 94 to 93 to 92 to 91, et cetera. What's the accounting treatment that causes that equity, investment in non-consolidated REITs, to decline?

Well, the way we calculate it is, we treat this under the equity method of accounting. So income attributed to us, based on our percentage of ownership, increases the value of our investment in those entities. And then distributions that we receive decreases that, and we true that up every quarter.

As you know, with REITs, they tend to pay out something north of net income on a GAAP basis, because they're adding back depreciation, and some different measure gets paid and, as a result, that investment balance decreases over time. Very much like shareholder's equity does if you're not raising more capital, because you're paying dividends out that exceed GAAP net income.

Got you. Okay. The Noblis deal turned out to be a great deal. I think you bought it close to a 9 cap. You could probably sell it today in the seven to 7.5 range. Is that on the market? And if it were to sell, how would you - what, would you have to do a 1031 to reinvest the proceeds to avoid a taxable event?

Yes, we would. That would violate the holding period for REITs, under REIT rules. So we'd have to do a 1031. It is not for sale.

Okay. That's it. Thanks.

Thanks, John.

Your next question comes from the line of [Matthew Prince with King Street Capital. Please, proceed.

Hey, guys, thanks for taking my call. I have a question. On page 20 of the supplemental where you showed the owned property capital expenditures -- I think this was touched on in the last call; I just wanted to make sure I understand -- the tenant improvements and deferred leasing costs of approximately $900,000 and $1.5 million -- are those actual cash costs incurred in the quarter?

They would be, yes.

And how come then on page 29 of the supplemental you don't deduct those to calculate your funds available for distribution?

Let me just take a look at your -- that's the FAD page?

Yes.

Yes. We view FAD as FFO essentially adding back, or excluding straight line, rent. And then we take out building improvements, which we sort of categorize in the maintenance CapEx category. We don't view leasing costs and TIs as maintenance CapEx, because those are recovered or amortized over the life of the lease. We view that more as an investment in real estate, not maintenance. And we think FAD is more appropriately measured taking into account maintenance CapEx, which you don't recover.

Okay, I understand that. But if I wanted to look at the actual cash available for distribution in the quarter, I'd have to take your FAD and then back out the cash PIs and LCs?

Yes.

That's correct. That's correct.

Okay, I understand. Thanks very much, guys.

No problem.

And at this time, I'd like to turn the call back over to Mr. George Carter for closing remarks.

Thank you, everyone, for tuning into earnings call. It was a little bit of a long one. I'll look forward to talking to you next quarter.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.