Franklin Street Properties Corp (FSP) 2010 Q3 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Scott Carter, genera; counsel. Please, proceed.

Thanks, and good morning, everyone, and thanks for joining us this morning for our Q3 2010 earnings call. With me this morning are George Carter, our Chief Executive Officer; and John Demeritt, our Chief Financial Officer.

Before I turn the call over to John, I must read the following statement. Please note that various remarks that we may make about future expectations, plans and prospects for the Company may constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of yesterday's quarterly report on Form 10-Q and in our annual report on Form 10-K for the year ended December 31, [2009], both of which are on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, November 3, 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 on 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 third quarter results, and we'll start with a short overview. Afterward, George Carter, our CEO, will further discuss the third quarter of 2010 and FSP.

I'm going to be brief, and we'll be referring to our earnings release, the supplemental package and the 10-Q that were filed last night. I'd like to start with our balance sheet which continues to serve us well. As of September 30 we had about $20.6 million in cash and $82 million in availability on our line, which totals about $103 million in liquidity to help operate FSP and fuel some 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 is 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 the 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 real estate.

Our interest rate coverage ratio is very high compared to our peers, at about 9.8 times for the first nine months of this year, and we finished the quarter with a leverage ratio of about 19.7%.

As of September 30th, we had $243 million in unsecured debt outstanding, and shareholders' equity of about $910 million. Our shareholders' equity is held by our common shares only, as we don't have any preferred shares or other type of equity instruments.

The $243 million in debt consists of our line of credit balance of about $168 million and an unsecured term loan of $75 million. Our line matures in August of 2011, and our term loan matures in October of next year, but it can be extended to October 2013.

With the maturities less than a year away, we've been talking with the banks in the bank group and others about the credit markets. We think the market has improved, and spreads have been coming in on lending. This seems to be a very good environment for a deal, increasing our line availability or floating rate debt, and adding an unsecured longer term fixed rate debt option to our capital structure.

We haven't started negotiations, but as we said a few months ago we're 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 good credit at a time when there is uncertainty in the 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 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 third quarter and first nine months of 2010, we did not sell any properties, so we did not achieve any gains on sale. And this is because the sales of properties in this part of the cycle in this market generally didn't make sense in our opinion, though in some areas pricing has firmed up.

Second, our investment banking profits continue to be impacted by the lack of improving office property fundamentals in this economy. We did close the last two syndications we had outstanding that we talked about in our last call. George is going to be talking more about that and a new opportunity.

Investment banking profits come from fees we earn on the value of the shares we sell as private placements. The sales of these private placements are what we call gross syndication proceeds, or sometimes referred to as 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 such as commissions, some G&A and related income taxes.

During the third quarter we achieved about $300,000 in gross syndication proceeds or GSP compared to none in the third 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. For the nine months of 2010 we achieved $2.7 million in gross syndication proceeds, as compared to only $550,000 through nine months of last year.

We measure performance of real estate operations and investment banking by FFO, which for the second quarter was $16.1 million, or $0.20 per share, about a penny lower than what we reported last quarter.

Comparing the third quarter of 2010 to 2009, FFO was down about $1.5 million, or $0.05 per share. The decrease was primarily from performance in our real estate segment of about $1.7 million, which was offset by an increase in contribution from the investment bank of about $200,000.

The $1.7 million real estate FFO decrease was primarily a result of decreased occupancy in the real estate portfolio in the third quarter of 2010 compared to the third quarter 2009, and was partially offset by a $600,000 increase in termination fee income we received in the third quarter of 2010 compared to the third quarter of 2009.

The investment banking FFO for the quarter was up about $200,000 compared to the third quarter of last year as a result of the two deals we closed at the beginning of the quarter. That covers our financial performance. The earnings release, supplemental and 10-Q will 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, and Scott. Good morning, everyone, and thank you for tuning in to FSP's third quarter earnings call. Normally, I would start this portion of our earnings call by going through my written comments in the earnings release trying to put a little more detail and perspective to them.

However, this morning I would like to begin by doing something else and that is to talk about the end of the third quarter of 2010 as potentially being an inflection point for FSP's future profit picture - an FSP-specific cyclical marker, hopefully, reflecting the bottom of this profit cycle for the Company.

And I'd like to list all the caveats to what I'm about to say, but the big one, obviously, is the market and economy. We're using our best collected judgments and assuming a stable market and economy going forward.

And if you believe as we do that the end of the third quarter 2010 is an inflection point for FSP, then to sort of understand that, I believe, you need to go back to the second half of 2007 when the financial crisis was beginning. We, I think, recognized what was going on fairly early.

And like most companies, we focused on two main objectives as we saw this financial crisis and subsequent economic downturn happening. The first thing we focused on was survival, the second thing to focus on is how can we take advantage of it. On the survival front, FSP certainly didn't have a problem with its balance sheet or losing properties or anything like that. We had very low or effectively no leverage as we started to enter the crisis.

The objective on survival is just to operate profitably assuming that this downturn may be long and deep. We just don't want to bleed to death long term. And so, being a basically unleveraged REIT, we had always paid a fairly high dividend, which was appropriate for the low leverage.

And so, the thought of cutting the dividend and trying to get it right the first time to get through this probably longer term downturn was on the table for operational profitability. And we looked to three main items there as we tried to determine what level to cut the dividend to. You want to cut it once, you want to see if you can get it right and be done with it.

The first thing we looked at was our investment banking business. This is a very transactional business -- investor generated business. And so, with the downturn we clearly thought that business would pretty much dry up. We took those profit streams -- those historic profit streams out of the equation.

The second was our portfolio properties. When we looked at the portfolio which was very well-occupied as we started to go in to the downturn in late 2007 and '08. But when you looked at it, we saw a very high lease role percentage -- extraordinarily high percentage of lease-roll really -- happening in over about a year and a half in the future, starting in the fourth quarter of 2009 through the first quarter of 2011.

That year and a half had an extraordinarily high percentage of lease-roll in the portfolio that happened basically from the way the portfolio was built through several mergers of groups of properties that we had syndicated in the past and this simply combined to have extraordinarily high lease-roll during that period of time. We have referred to over the last year or so and in writing and so on as 2010 -- full year 2010 being our hump year and it certainly has been that.

Not only in our portfolio did we see high lease-roll coming during this period of time, but when we looked at the lease-roll and looked at the tenants involved, a lot of the tenants we thought would be very hard to keep or retain because they have tenant-specific issues that were associated with them -- I mean, examples are like Staubach in Addison Circle having merged with Jones Lang LaSalle, Tektronix at Collins Crossing had a large merger. Sybase in Greenwood Plaza in the Denver area, Sybase, when we bought the property, only leased a very small percentage of it. They had subleased most of the property before we bought it, so we knew that lease wasn't going to happen. And then, the whole Innsbrook, Land America bankruptcy was a slow-motion thing that we knew was coming. Because of our lease with CapOne, we had some time there to see that coming.

So, we knew not only did we have a high percentage lease-roll, but there was a pretty good chance that a lot of the tenants -- and some of the bigger tenants -- would be tough to keep.

And the third part of the portfolio view was that many of the rental rates on some of those big tenants on the lease-roll properties were some of the bigger spreads against current market rates in those various property submarkets with comparable properties. So, the rent roll downs would be fairly significant. So we tried to take that into account on the dividend cut.

And then, of course, third was GOS, or gain on sale. We did not anticipate, obviously, a good environment to be selling properties, so we took that out of the equation too.

We adjusted the dividend down to $0.19 from $0.31. Sitting here today, I think we got it right.

The second thing we did other than survival is to try to look at how to take advantage of this opportunity that most big cycle dips provide real estate investors, and that was to acquire additional properties that we thought were real values to continue to position for the eventual bottoming of the cycle and the upturn.

We had never used debt before to permanently acquire. We had a great balance sheet and we thought it was time to use some debt to do some permanent acquisition. We did that. We purchased seven properties, seven of them directly into the portfolio, three in 2008, three in '09, one in '10 -- so far in '10.

We have increased the number of properties over that period about 25%. Those properties included about 1,412,000 square feet, so we increased our square footage by over 28%. The cost of those properties was about $238 million, which averages about $168 a square foot. We purchased most of them between eight and nine cap rates in-place. We think, very good prices per square foot relative to replacement cost, et cetera.

We have increased rental revenue over $20 million from the end of 2007, where we were about $101 million of rental revenue, to the end of 2009 we're about $122 million of rental revenue.

Our growth in rents though from the new acquisitions have not translated to growth in our per share profits, even though we think we've done a real good job of positioning some great properties. We've had a number of major offsets to profits -- list those here. The first is vacancies. Obviously, we held a 90% -- plus 90% area right until starting in the fourth quarter of 2009. But the vacancies, they hurt a lot. They really offset our profit growth.

We also have in our vacancy picture big tenants in certain properties that when those leases expire, those properties just don't drop rent down to a level where you're collecting less, they actually go negatively, they drop below. It depends on the property, but 50% occupancy once you get below that, the property is not feeding you, you're feeding the property.

And so, if you look at our leased percentage on properties we've distributed, you can see that some of the bigger properties with these bigger tenants that have the lease-roll actually have gone negative on us in terms of occupancy and operating costs. The big two sort of last hurdles in our mind was Collins Crossing in the Greater Dallas area and Greenwood Plaza in the Denver area.

Vacancy also leads to re-lease, and re-lease at lower rents. So, when you re-lease vacancy you have rent roll down. And not only do you have rent roll down, but you generally reset expense stops, and so you have higher operating expenses. So, number one offset to the profits has certainly been increased vacancy. We've gone from 92% basically down to 82% in the last three to four quarters from the lease-roll.

The second area is investment banking. Investors -- we aren't unique in this, particularly high net worth investors generally were traumatized by the downturn. There's still uncertainty, but there has been a lot of uncertainty over the last couple of years of -- from investors on where to invest, and particularly what to invest in relative to real estate -- commercial real estate, residential real estate, et cetera.

There is more emphasis from our average investor on the need for liquidity, and many of our investors have had money tied up longer than anticipated in some of our single asset REITs that they've invested in because, again, these single properties were caught in the same downturn as all other commercial properties were, and timeframes for completion of those transactions in terms of ultimate liquidity have been lengthened.

And most recently, as some of these conditions have improved with investors, acquisitions that make sense for this product and this business have been very, very tough to come by.

Another offset, of course, has been some level of debt service. We are borrowing to buy in effect. And while we have a very accretive spread on our debt service to cap rate ratios, there still is an expense there that effectively we didn't have before starting to use debt to permanently acquire.

Equity dilution is another factor that offsets our profits per share. We are a REIT that continues to view itself as modestly -- moderately leveraged. And while we're using and anticipate using permanent leverage going forward which, again, is a change since 2007, 2008, we anticipate that leverage to be moderate and as leverage grows though acquisitions, our vision is to pay that leverage down if the equity market allow us to.

So, in September of '09 we did our first-ever equity offering. We have an ATM in place now. Equity acquisitions at various prices of stock and various prices of properties can also be accretive, but much less so than on debt. Obviously, the difference between the risk/reward relationship of equity and debt is important to FSP, but, certainly, equity dilution is a partial offset.

And lastly, of course, we haven't had any properties for sale. And while GOS, gain on sale, does not affect operating earnings, i.e., it doesn't affect FFO, it has been in the past a big cyclical source of our profits, we anticipate it to be in the future. It is really an integral part of our total return strategy.

We fundamentally are mostly a suburban office REIT. Suburban office almost by definition means non-land constrained. That kind of asset class tends to have a definitive cycle of pricing to it. There are times to invest -- like now we believe -- and there are times to sell as we did between 2005 and 2007.

So, if the third quarter of 2010 does mark an inflection point, then I think the questions are, why and what do you see boosting growth in the future? And you can almost go down and do the opposite of what caused a drop in earnings to-date.

First is occupancy gain. And the most important thing that we can do is gain occupancy. We, at the end of the third quarter, were about 82% occupied. Getting occupancy back up in to the 90% level will have a very meaningful effect, we believe, on our profits and profits per share.

And when you look at the next quarters and years, we think we can do that. The first issue is, if you look forward past the first quarter of 2011, we see a much more normal or modest percentage lease-roll going forward than we faced over that year and a half year. We don't see another sort of 2010 hump year ahead of us relative to the high percentage of lease-roll.

Secondly, when you look at the lease-roll going forward and you look at the tenants involved in expiring leases and so on, we don't have the same tenant-specific issues that we had going into 2010, i.e., we think we'll be able to have a very good chance of keeping a lot of those tenants, where we effectively knew we wouldn't keep a lot of the big tenants in this current lease-roll.

And, lastly, when you look at the rent levels that those tenants are paying in upcoming lease-roll, the spreads between their current rental rates and current, market rates in those submarkets against comparable properties is generally less than the spreads of the tenants and leases that have been expiring. So, both in terms of percentage, being able to keep tenants and rent rolled down, we think we can show a meaningful occupancy gains in coming quarters and years.

The second thing that we really think is going to start to add to profits going forward is our investment banking business. To make meaningful profits on an annual basis in our banking business, you have to do about $50 million of equity sales or better. We have been lagging that for the last couple of years, and so our investment banking business has basically been losing some money for us over the last couple of years.

We do see that starting to turn positive. We have talked and continued to talk to our investor group. Investors are getting their feet under them again after the downturn. They are definitely feeling the necessity to invest. They're replenishing cash reserves. There are maturities of bonds and other things that are happening to wealthy individuals. They do need to do something with the money.

Most of them talk to us about the lack of being able to get any significant yield out in the marketplace. While most of them seem to be worried both about deflation and inflation, there clearly is a worry and a need for some sort of inflation hedge protection both on the yield and the inflation hedge protection. They still view real estate and FSP as a viable option.

Many of the single asset REITs that have been tied up over the last couple of years in the downturn are starting to make some progress. As the market stabilizes and some sort of cyclical recovery gets underway we would anticipate in the coming months and years more liquidity happening in those single asset REITs, which again feed back to our investor group.

And right as we sit here today, we are seeing better visibility of, I think exciting product for the Investment Banking Group than we have seen in the last couple of years. So, we're very optimistic about investment banking going forward.

The third area continues to be acquisitions. We have made one acquisition in 2010. We have been working on a number of them. We are working on several now. Our acquisitions are -- have been accretive and we would anticipate them to be accretive. Again, we are working on several opportunities now both for direct acquisition within the company, as well as acquisition for our investment banking business.

And last is gain on sale, GOS. Again, it's not an operational earnings item, it doesn't contribute to FFO. But as the cyclical recovery starts to take better hold, I have no doubt that we will start to take advantage with some of our properties that we repositioned between '05 and '07. Some of our newer property acquisitions that we made in '08, '09, and '10 -- some of the pricing in some of our markets is looking interesting.

Just to sort of finish this segment, just keeping in mind all the caveats -- and, again, the market and the economy are the big ones -- we think that FSP has crossed the deepest part of its own river. And we are very much looking forward to future growth potential and are very optimistic.

Just to finish my segment, and then we'll open it up for questions, I will make a couple comments on my written remarks in the press release. If you look at our directly-owned real estate property portfolio of 33 properties, as of the end of September 30th this year, at the end of the quarter, we were about 82% leased. As of the end of October, a month later, we are over 83% leased. We've done a little bit of leasing -- a number of properties have had small leases added and some subtracted, et cetera.

The two that I might just update on the call would be --- if you are looking at the earnings release, it would be Property Number 15 on the earnings release, which is -- I think it was page 12 on -- at least on my earnings release. That would be Collins Crossing in Richardson, Texas. That's Greater Dallas. That was about 28.8% leased as of the end of the third quarter, as of the end of -- or as of today we have done an additional approximately 57,000 square feet of leasing and that property is about 48% leased today.

In Innsbrook, which is Glen Allen, Virginia, the Greater Richmond area, it was about 31.3% leased as of the end of the third quarter. We've done additional -- about 28,000 square foot of leasing there, and that takes that property to 40%.

Those are the two only significant ones that I want to tell you about. I would tell you though, that in all of the properties that have big vacancies, maybe with the exception of Federal Way which is in the Seattle, Tacoma area, we have a lot of activity. The Collins Crossing, Greenwood, Innsbrook -- a lot of the big ones that can really have a big impact -- we do have a lot of activity. And so, we're -- again, activity is one thing and getting the leases signed is another, but, again, we feel optimistic about a continued occupancy gains.

In terms of property acquisitions for the third quarter of 2010, there were none. The Company does continue to work on additional property acquisitions, again, as I mentioned, both for direct purchase into the FSP portfolio and for syndication through our Investment Banking Group. And we would anticipate our current efforts to produce additional property acquisitions this year.

During the third quarter, as John mentioned, our Investment Banking Group really did not generate a new syndication investment opportunities. We finished up a couple of deals in terms of really money and paperwork. Consequently, equity sales for the quarter were only about $300,000 relating to syndications. The banking group lost about $400,000 or about a penny per share for 2010.

Currently, we do have a new $30 million private placement syndication open. And as I said, we believe that going forward we have better visibility now for potential future syndications after the current $30 million deal that's open now than we've had in quite a long time.

And, lastly, FSP did not have any properties listed for sale during the third quarter of 2010, so obviously there was no GOS. But as I mentioned, as we go into 2011, assuming a continued cyclical recovery even of modest amounts, I think there may be some opportunities for us in that arena finally.

With that, those are my prepared remarks. I would b happy to open it up for questions.

(Operator Instructions)

And our first question comes from the line of Dave Aubuchon with Baird. Please, proceed.

Yes. Good morning. Good recap, George. A couple of questions. First, regarding the syndication. You mentioned you have $30 million syndication open right now. What's your expectation of actual dollars raised during Q4?

I really can't talk about it, Dave. Again, the syndications we do are all Reg D, all accredited investors and so if you start talking anything other than just saying there's something open, you start to get in to trouble there. So, I'll just have to leave that. I'm sorry.

Okay. And if I recall, the pattern last year was fairly flat until the end of the year. Is that correct? So, is there any sort of calendar, sort of issues that would create a desire for investors to invest toward the end of the year?

You know, historically, our banking business has been stronger in the fourth quarter. You know, I'm not exactly sure why, except, historically, in the old days a lot of syndications were tax-driven. And so, there's this sort of cycle that seems to be a fourth quarter cycle as people start thinking about their taxes.

Also, the fact that these investments are illiquid, I think a lot of investors when they get through April 15th tax time and then there's summer vacations, so -- and they sort of look at year-end at the amount of capital that they believe they can afford to keep illiquid for certain periods of times. I think that's a factor.

So, generally speaking, those tend to be cyclical factors in the investment banking business. However, I will tell you that what trumps all of that by many fold is simply a very good investment opportunity. And we've had good investment opportunities that have really done well in any quarter. So, it's much more deal specific than some sort of, you know, absolute cycle.

Okay. And then just -- you provided some decent commentary regard the acquisition. But, can you give a little bit more detail, maybe, sort of what -- like your mindset is regarding the outlook for acquisitions, what sort of opportunities you're seeing? I'm assuming that you're maybe seeing a little bit better pricing on value-add deals, which would suggest that there's more deals going through the investment banking side of the business.

But if you can just sort of give a little bit more detail regarding the layout of acquisitions as you see them right now.

Yes, I would say that, generally, that's right, Dave. You know, if you believe that we're at the bottom or bottoming here, if you believe that the cycle no matter what sort of curve is probably up from here, which we do, then you look at potential value add opportunities differently. And I don't think we're much different than other real estate investors in that regard; more people are looking at value-add opportunities.

They can be generally speaking -- at least in our markets, which again mostly are suburban markets -- bought at much better pricing. And when you do your runs, your IIR runs and lease-up and capital expenditures and so on, you can program in at least a flat or mildly rising market rather than a down market.

So I think, generally speaking for direct acquisitions into the Company, we are looking at a little more value-add than we had been before. The property that we bought in Minneapolis earlier this year definitely starts to fall into that category, and I think you'll see more like that.

For the banking business, though, you know, the deals or properties that make sense for the banking business take on a lot of different character and a lot of different view. They have a lot of different wrinkles to them that may or may not make sense for FSP.

One of the things that is also swirling around the marketplace now is better financing. And so, I think you're going to see on many of our coming banking deals property-specific leverage but for the portfolio, the direct acquisitions and the FSP, I think our view is to not have property-secured debt -- to keep as best we can unsecured debt. It just creates so much more flexibility for us in the portfolio.

But, wherever the opportunities are, we will go. One of the things that I think has happened -- and I will be curious to hear from other people at NAREIT about this -- that some of the sales as you know, particularly in the gateway markets of properties, have really been -- really good pricing. I mean, low cap rates, fairly high prices per square foot. Now, again, these have been relatively narrow gateway-type markets, CBDs or really infill gateways suburban locations, and that drew out a lot of potential sellers. I think a lot of real estate brokers call a lot of potential sellers and say, have you seen this price? You know, we should be able to get close to that.

And so, a lot of properties have flooded on to the market really sort of in the second half of the year. I think, too many properties. I think a number of those properties either don't get sold, withdrawn from the sellers or if the sellers need to sell, get priced better than they anticipated when they put them on the market. We definitely want to try to search out those opportunities.

So, are you still seeing -- is your cap rate range that you sort of thought about and talked about earlier in the year still sort of hold true that 8% to 9% band initially?

I think it does, generally, hold true. I think you're probably at the lower end of that band than the higher end for certain kinds of properties. For true value-add though, where you really have the capability of after adding the value, being at an effective, 11%, or 12% or 13% cap, that is being priced in and you're seeing cap rates come in much more for really quality properties in the 6% to 7% level in our markets, than stabilized properties which, again, I think, are still in that 8% to 9% cap rate range. But, again, probably at the lower end of that range, Dave.

Okay. And so, last question. And I know you're hesitant to talk about specific leases. But, just looking at your top exposure, Amdocs -- I can't remember what the status of that lease and where that lease is located. Can you just give some -- a little bit more detail about your expectations regarding that renewal or potential renewal?

Which tenant is this?

Amdocs which expires -- it looks like -- in eight months here -- 92,000 square feet. Your 15th largest tenant.

Yes. I'll tell we're going to do a little less about coming business. What we found is clearly that there are other people that listen, and brokers are doing their job -- leasing brokers. And so, sometimes talking about stuff that's coming is not as smart, even though I do want to inform shareholders.

But Amdocs is in our Chesterfield properties outside of St. Louis. Amdocs has been a wonderful tenant. We certainly hope to retain them.

Okay. Perfect. Thank you, George.

Our next question comes from the line of John Guinee with Stifel. Please, proceed.

Hi. George, nice job. John Guinee here. What's the status on the Interlocken deal? Have you gotten C of O there, and what's your loan outstanding and then what's the total capital stack?

We have CO'd the property. It is partially occupied by two tenants now. Webroot, which is one of our larger tenants who is currently building out their space. We hope to have them in by year end or the first of the year. So, that property will be -- by the first quarter hopefully, 50% occupied. It is currently 50% leased.

And, John, do you have some stats for --?

Yes. The drawn amount of line as of the end of September was 36.2 million, John.

So in mortgage receivables, 36.2 is the Interlocken deal?

Yes.

And then, what's your -- assuming you get all the way to stabilization in the next year or so, what would be your total basis on that?

Well, the total amount of the construction loan was $42 million and that would basically be the only asset we have related to that entity. And we -- may take that out with a third party loan and could go to zero.

Okay. And then the -- there's a syndication above that.

Yes. The syndication has already taken place, and so we don't own any preferred shares in that, or don't get any economic benefit from that particular property other than the interest we receive on the loan.

Okay. Great. And then, in terms of your leasing stats, if just look at TIs plus leasing commissions, it looks like about -- around 14 million year-to-date. How many square foot does that relate to just so we can get a sense on TI plus leasing cost per square foot in your portfolio?

I don't have that number for you, John. I can tell you that the more significant part of the CapEx we've incurred so far related to, I think, two or three fairly significant leases that we did in the portfolio.

Okay. Okay. And then --

One of them was CITGO and I don't remember the name of the other tenant off the top of my head here, but --

And the share price, why are you not using your ATM or CEO?

The ATM was open last quarter, but, again, our vision with equity is we want to try to match equity with acquisitions, and we just didn't have any acquisitions front and center last quarter to warrant doing a significant amount of the ATM.

Okay. And then, you have a $30 million private placement syndication open for subscription now. Is that asset on your balance sheet or not?

No. It's not in our balance sheet yet. It would be a fourth quarter transaction when we actually lent the money to the single asset REIT that is going to hold that asset.

So, essentially, you have that asset under contract, but you haven't closed on it? Is that -- how do you control the asset as you go out there and try to syndicate the equity?

You got it correct. We have it under contract.

Okay. So you have it under contract and you're going down the path of trying to syndicate the equity. So, how do the mechanics work? I guess I'm trying to figure out why that isn't an acquisition for the REIT, why that's an acquisition for your syndication business, and then how the decision gets made that if you're unsuccessful on the syndication all of a sudden you invest in it on behalf of the REIT. How does that all work?

Well, I'm not exactly sure what you're asking to be honest with you, John, but the syndication business is a separate business in our company that we've had for 15 years, so we continue to acquire properties for syndication and we do bank those properties. In other words, it truly is an investment banking business. And while we have the syndication open, we don't have money in from the syndication. We'll be buying the property.

In the syndicating entity -- so we're going to form a new corporation, it will be a REIT. That new corporation will buy the property that we've identified for syndication. And FSP, as the investment banker, will loan the newly-formed entity virtually 100% of the acquisition cost because a newly-formed entity doesn't have any capital at this point. A 100% of the acquisition cost of the to-be-syndicated property. And then, the FSP will be secured by that -- effectively by that property or an interest in the syndicating entity.

As the syndicating REIT raises capital and sometimes it raises capital quickly in good markets, and sometimes it takes a longer period of time, FSP's loan which it has made to bank the property, gets paid back. And it gets paid back plus a loan fee, which is really our main investment banking fee. It's the main fee that all of our shareholders make when we do a piece of investment banking business.

So, we are using -- I mean, the big difference is we have only used until really the end of 2007 or the start of 2008. We have really only used our balance sheet, our line of credit, drum loan, et cetera, for money to do investment banking business. And that money has always gone out and then been repaid by the syndication plus the fee. And that's what we will continue to do.

What the big change is, is that we now are using the balance sheet to acquire properties directly into FSP and anticipate maintaining some level of ongoing and just existing indebtedness at FSP.

But the -- what properties we acquire for syndication versus what properties we acquire for FSP have many different parts to them. We tend to want to do property-secured debt on our single asset REITs, we tend not to want to do them in FSP. Some properties lend themselves to that better than others.

We tend to, depending upon the availability of properties out there, may or may not have enough capital to invest permanently in a property at the FSP level, but can invest short-term in a property and turn it through the investment banking business. So, that turns our capital quicker to do it in the investment banking business.

Some of the properties that we do in syndication or investment banking are just properties that we wouldn't consider for FSP, for example, like the 385 Interlocken spec development that was done. I mean, we -- FSP is not likely to take its capital and develop a spec development deal where our clients in our investment banking group will do that. It's a different -- a different risk/reward relationship.

So, there are a lot of factors that go in to what properties we choose for what business. But it's driven by -- I don't think much different economics than any other investment firm/investment banking firm. They're two separate businesses. They run separately. They have two separate profit, structures, capital -- permanent capital structures, et cetera.

One other thing, John, I just wanted to add was, we don't pre-sell these syndications prior to acquisition and then change our mind afterward. It's not like that. It's, the way George described it, we do act like a true investment bank. We make that loan to acquire the property and then go and sell it. So, it's not pre-sold.

But, historically, we have done 45 or 50 of these and generally enter into them expecting we're going to syndicate them fully. We only have investments ourselves in three or four of them -- three, actually, to be exact.

Okay. By the way, the three that you have investments in, are those -- is there any leverage associated with those, or are those 100% equity deals?

One of them has some leverage on it and the other two do not.

No. Two have leverage, one does not.

Two?

George Carter Yes. Phoenix --

Yes, Phoenix has --

Yes. Phoenix Tower and Grand Boulevard have leverage. 303 East Wacker does not.

And what's the leverage on those? De we know? Or, is that in the K or the Q?

On Phoenix Tower it's very small, less than 20%, and in Grand Boulevard it's less than 40%.

Okay. I guess what I'm trying to get at is, the mechanics are this; you -- the single asset REIT buys the loan -- buys the asset with 100% loan-to-value by Franklin Street Properties. And --

Right.

-- you go ahead and attempt to syndicate it and essentially syndicate 100% of the equity, so there's no leverage on the asset. However, if you are unsuccessful in syndicating it to the tune of 100%, Franklin Street all of a sudden changes their mind and says, okay, I think we'll invest in this, which is what you did at 303 East Wacker, Grand Boulevard in Kansas City and Phoenix Tower. Do I have that right?

You're making some assumptions there, John, which probably aren't accurate. But, there are -- we don't do any joint ventures with other players outside. We think some of those joint ventures have a level of risk which we're not willing to take. There are situations which can make a lot of sense for a lot of reasons for both sides.

So, why did this asset that you have under contract right now for the single asset REIT -- why didn't you just buy that on behalf of Franklin Street?

Because we thought Franklin Street could make more money and we thought it would fit better with our investment banking group.

Okay. But then, you're effectively backstopping your investment banking group in that you're going to bridge the equity gap similar to 303 East Wacker, Phoenix Tower, and Grand Boulevard if the syndication does not fully -- is not fully subscribed. Correct?

No. That's not correct. That is not anywhere shape or form part of the deal.

So, what happens if the syndication is not fully subscribed?

We can do --

(Inaudible) a loan on the asset.

Yes. Well, we can take the asset back and give the investors their money back. We don't have to invest alongside them. There's a lot of things we can do. Just so you know, we have never ever in our history not completed a syndication. There are three syndications out of 40 or 50. There are three syndications over 2 billion that FSP has actually bought shares in. Every other one has been completed.

It's good business. I mean, certainly like, why does Merrill Lynch not buy the investment banking business that they do? Why doesn't investment bankers for GM buy the GM shares? Why do they syndicate them out? Because there's so much of them, number one, you can't buy them all, and two, you can do the business and make your shareholders money.

You know, there's plenty of property, the question is not - there is not enough property. The question is, is there enough capital and how do you allocate your capital to do business to make money for your shareholders? Every dollar of revenue from every source of profit at FSP goes to one thing, the common shareholder. This is a very profitable business when it's rolling -- very profitable.

Okay. Thank you.

You're welcome.

Our next question come from the line of Matthew Prince with Kane Street Capital. Please, proceed.

I'm concerned about the dividend. Let me walk you through what I'm concerned with. When I look at the actual funds available for distribution, which I define as the FAD you present on Page 29 of the supplemental less the actual tenant improvements and leasing commissions incurred -- in this quarter you earned about $10 million of actual FAD.

Last quarter it's about $13 million, first quarter is a little more than $8 million. That's about $31 million versus $45 million of dividends - so that's about a $14 million shortfall. On an annualized basis that's about 18 million or 19 million. You know, that's a big shortfall.

And what I hear from you is that, you're hoping the market comes back to you so that you can increase occupancies so that you can do more investment banking, and so that you can make acquisitions. And I totally understand that hope, but, I personally, don't see any evidence for that recovery yet.

And so, my question is, if the market doesn't come back to you like you're hoping, how long will you continue to pay out more than you're earning? At one point, might you could contemplate another dividend cut during more sustainable level?

Matt, it's John Demeritt. I'm looking at Page 29 of the supplemental and I'm looking at the FAD numbers that you mentioned. And in Q1, Q2, and Q3 I see FAD of $15.2 million, $15.5 million and $14.2 million respectively.

Right. That's before the cash tenant improvement and leasing commissions you had to pay in those --.

Okay. I -- you're adjusting the numbers to something different which, in our opinion, is exactly the wrong way to look at it. We look at tenant improvements as investments similar to acquiring real estate and really differentiate between operating cash used to pay dividends and operating cash used to make investments that we're going to get a return on.

So, fundamentally, I think we disagree with how you view it. I certainly understand mathematically how you view it, but I think that's an important point for you to think through.

Well, what I'm trying to get to is the actual cash you have at the end of the day in each quarter that you've generated versus the dividend obligation. And the actual cash revenue each quarter is the number you present minus the TIs and the LCs. Right?

I understand the math you're doing. I just -- fundamentally, we don't view it that way. We view it as an investment we're going to get a return on. And we understand -- as George alluded to in his comments -- that when we reset the dividend in 2008 we contemplated some of the lease-roll and see this as a cycle that we're working our way through, and think we got it right.

Now, that's caveated by the fact that the Board of Directors does vote the dividend every quarter, so I'm not trying to make a future projection when I say that, but we did contemplate that when we cut the dividend the last time.

Yes. I think that's right. I mean, we're very lowly levered. You know, without preferreds and without other draws in the money, we have a very high coverage ratio.

So, our view of investing capital right now for future income streams is one of the things we really want to do. Whether you go buy a new property to generate a current income stream, or whether you do TIs and leasing commissions on an existing property to generate a future income stream, what you're trying to do is believe that you can generate those future income streams from the capital you have.

I mean, we -- if you thought you weren't going to generate the future income streams which generally are represented by FFO, then you'd say, well, we will bleed to death long term. You do need to cut the dividend. The question is not cash, the question is, are you getting the return on your cash investment either through new properties or TIs and leasing commissions.

This hump year as we call it, this year and a half, really, we fully anticipated our FAD as you had calculated to be very low. And around here the question is, why isn't it lower because that means you're not doing the leasing.

I mean, we would like to be able to use a lot of cash to lease up the properties and get the future income streams from our investment. If we do not see the future income streams coming from the investment either on new properties or existing ones, then, obviously, the dividend will be considered for another cut.

But, what you're seeing right now for this sort of year and a half period, again, was contemplated in the Q. And I think -- as I said earlier, I think we're through the worst of it. Now, we'll see -- and the proof would be in the pudding, but we think we are.

And it appears we do not have any more questions in the queue at this time.

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

Well, thank you, everybody, for tuning in to the call. We appreciate it very much. I would just like to tell everybody that we will be at NAREIT in New York November 15, 16, and 17, and hope to see some of you there.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.