Franklin Street Properties Corp (FSP) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Franklin Street Properties Corp. Q2 2012 results conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). Please note that this event is being recorded. I would now like to turn the conference over to John Demeritt, Chief Financial Officer. Mr. Demeritt, please go ahead.

Thank you. Good morning, everyone, and thank you for participating in this call. Just to start things off, we've added a couple of people today for Q&A. Jeff Carter, our Chief Investment Officer, is with us and Janet Notopoulos, the President of our property management company, is also with us, as is George Carter, our Chief Executive Officer.

Before we make our comments, I must read the following statement. Please note that various remarks that we make -- 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, 2011, and as updated on the 10-Q we filed, all of which are on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, August 2, 2012. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligations 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.

Having read that, I will begin with some comments about the second quarter, and will start with a short overview. Afterward, George Carter, our CEO, will further discuss the quarter in FSP.

I'm going to be very brief and will be referring to our earnings release, the supplemental package, and the 10-Q that were filed last night. As of June 30, 2012, we've had cash of about $22.6 million and $106 million in availability on our line of credit, giving us about $128.6 million in liquidity. Also at June 30, we had $494 million in unsecured debt and our total market cap was about $1.4 billion. We only have unsecured debt on our balance sheet, and our debt to total market cap ratio was 36% at June 30. This debt structure and level continues to provide an attractive loan to value for our lenders and investment bankers. We are exploring a number of additional financing possibilities with them currently to position us for more growth.

FFO for the second quarter of 2012 was down about $1.1 million, or $0.02 a share, compared to the second quarter last year. The decrease in FFO was primarily because we had $3.3 million in contribution from our investment bank in the second quarter of 2011 that we did not have in the second quarter of 2012. We have previously announced we are not doing any new syndications of real estate. This decrease in FFO is partially offset by the benefits of real estate investments that we've made over the last 12 months. These include two acquisitions we made in the fall of 2011 and interest income from $106.2 million secured loan that we had for the full second quarter of 2012. And neither of these investments did we have in the second quarter of 2011. We also have the benefit of new leases signed over the last year of releases that had expired, which raised our occupancy to 90% compared to 86.9% at June 30, 2011.

I'd also like to point out that, on our last call, one of our research analysts suggested that we include same-store comparisons. We thought about that and have included in our 10-Q and supplemental reports that information. Same-store results for the first six months of 2012 were up 4.7% compared to the first half of 2011. This makes a lot of sense, given the leasing that was accomplished in the last year. To make the same-store results more comparable, we exclude bankruptcy proceedings we received this year from our NOI in that analysis, which you will see noted in the filings if you take a look at them.

So that's a brief overview of our financial performance. The earnings release supplemental and 10-Q filings go into further detail about our results. We can take more questions at the end if you wish to discuss them further.

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

Thank you, John. Welcome, everybody, to our second-quarter 2012 earnings call. As is custom, I will discuss this call -- on this call, my written comments and last night's earnings release and then I'll open it up for questions.

For the second quarter of 2012, FSP's profits, as represented by FFO, comes from operations, totaled approximately $19 million, or $0.23 per share, a decrease of approximately $529,000, or $0.01 per share compared to the first quarter of 2012. From an operational revenue point of view, our operational profit point of view, our revenues and profits were pretty much flat between the first quarter and the second quarter. As John mentioned, these bankruptcy proceedings that -- proceeds that we got in the first quarter -- and this was from a former tenant of our Innsbrook in Richmond, Virginia property, Land of America and, where a creditor there, and as those bankruptcy proceedings continue, we get checks sometimes. You never know exactly how much they'll be and when you'll get them.

That property, Innsbrook in Richmond, Virginia, has been fully leased for some time now and so this thing with Land of America just proceeds with us as a creditor.

But again, from an operational point of view, our operating revenues and our operating profits were about flat between the first quarter and the second quarter. Some of the new leasing has got to get -- get through [three rents] before they start to kick in on the FFO line.

Our directly owned real estate portfolio of 36 properties, totaling about 7.1 million square feet, was approximately 90% leased as of June 30, and that's up from approximately 89% leased as of March 31. Most of the rental leasing markets where our properties are located remained stable during the second quarter, both in terms of occupancy and rental rate levels.

We continue to make slow but steady progress on our leasing efforts. Our property portfolio has relatively modest lease expirations over the next 2 1/2 years. And, along with our improving occupancy levels, should allow overall tenant improvement expenditures and leasing costs to moderate in relation to the level of rental revenues being achieved. And we are seeing early signs of that trend in our projections in the coming quarters, is for that trend to continue.

One of the things about occupancy that just should be taken note of is that we did recently acquire a property in Atlanta, which I'll talk about in a minute. It's a value add play that has vacancy in it and so, as that square footage comes into next quarter, there may be some hiccup relative to occupancy as you include that value add play into the whole mix. However, I will tell you that at some of the properties in our portfolio that have some vacancy right now, we have continuing good leasing activity on the value add property we just purchased in Atlanta. We actually have currently some very good leasing activity.

We are very optimistic that our leasing percentage -- our occupancy levels -- will continue to rise in 2012 and 2013. Again, we are having, I think, slow but very steady success in getting back into that hope for sort of mid-90s range, which is for suburban office about practical full occupancy.

There were no additional real estate investments completed in the second quarter of 2012. However, on July 5, FSP made a $33 million two-year bridge loan on a suburban office property located in the I-10 Energy Corridor of Houston, Texas. The property is a 14-story, multitenant Class A office building containing approximately 326,000 rentable square feet.

This property is owned by FSP Energy Tower One Corp., a single asset REIT affiliate of FSP, and is approximately 100% leased. The loan is secured by a first mortgage on the property. For those of you that sort of understood our recent loan, which has actually been repaid, on 50 South 10th Street, our Minneapolis, Minnesota property, this loan is very, very similar to that in concept.

Energy Tower Corp. purchased this property in Houston some six years ago. We have been managing it sends. And there was one large tenant in it at purchase and we did assume a loan on the property when Energy Tower Corp. purchased it. That loan is -- was maturing. The large tenant in the property has only two years remaining on its existing lease, and the lender on that property did not want to extend the loan.

Energy Tower Corp. commissioned a survey of lenders and, when looking at what might be able to be done to refinance that property, Franklin Street Properties thought it would be attractive, and so stepped into that position. Energy Tower Corp., FSP, we are very optimistic that this will be another great loan, as the loan to Minneapolis was, and we are working with the existing large tenant on an extension. We hope to be able to accomplish that, but there's no guarantee, of course. And that sub market that this property is in, in the Energy Corridor in Houston, is a good, strong market, and we feel that even if we can't extend the tenant, we can lease the space.

So we view this as a very good loan. The metrics of this loan are much like the metrics of the Minneapolis loan that, again, was just recently repaid.

Also, on July 31, FSP purchased a Class A suburban office property in Atlanta, Georgia, known as one Ravinia Drive, for about $52.8 million. This property is 17 stories, contains approximately 387,000 rentable square feet and is approximately 82% leased to numerous tenants, and is located in the Central Perimeter sub market of Atlanta. FSP and its affiliates have been investing in the suburban Atlanta office market since 2003, and we currently own three properties there, totaling approximately 907,000 square feet.

As I mentioned earlier, this is really a value add property we've been keeping our eye on Atlanta the last few years. It's a traditional, big, cyclical market that has big ups and downs. We feel Atlanta has started a recovery. We started to see it in a couple of the sub markets, most notably Buckhead at this point. We believe the Central Perimeter market is a market that will be sort of next to benefit in a continuing Atlanta recovery. This is an iconic property bought at a very good price. We're very excited about it and have leasing activity at it right now.

There were no property sales in the second quarter of 2012, although we always review and evaluate our directly owned portfolio for potential advantageous disposition opportunities. In addition, certain properties owned by some of our inning single asset REIT affiliates in which FSP may have a financial interest, could become possible candidates for sale as they stabilize their occupancies and the markets in which they are located become more attractive to potential acquirers.

FSP Phoenix Tower Corp., a single asset REIT affiliate of FSP, owns a 34-story, multitenant, Class A office building containing approximately 629,000 square plus feet located in Houston, Texas. And that property is currently being offered for sale. FSP has both an equity and first mortgage loan investment in FSP Phoenix Tower Corp.

We -- the energy markets had gotten a lot of momentum in them at the start of this year, sort of the second half of last year, Houston being one of the obviously key markets in that area. And there was quite a bit of cap rate from compression and, again, a lot of potential buyer momentum in those energy markets, so Phoenix Tower was put into the market and has generated a lot of interest.

I would say, however, though, that since that property has been put on the market -- and we're seeing this through all of our energy markets that we are in -- Denver and Dallas, even, as well as Houston -- that some of the bloom has come off the rose relative to energy. There is certainly some concern. I mean, when we started the marketing of Phoenix Tower Corp., oil was about $100 a barrel. It's significantly less than that now and there's a lot of talk about global slowdown in price per barrel of oil and so on in the future.

So some of the buyers have paused a bit in the energy markets. But we still have activity at Phoenix Tower Corp. and hope to complete a sale there.

One thing that hasn't waned yet in the energy markets and in Houston is leasing. The tenants certainly looking at the energy markets longer-term and leasing activity is still strong in the energy markets. This Phoenix Tower property is a multitenant property and is 90% plus leased, and we have continuing good leasing activity at the property.

As I mentioned earlier as well, on July 27, FSP's $106.2 million, two year bridge loan to its single asset REIT affiliate, FSP 50 South 10th Street Corp., was repaid in full from the proceeds of an institutional third-party, first mortgage loan secured by the Minneapolis, Minnesota CBD property. This loan was a five-year interest-only loan, which was actually just like the original loan that was put on the property at acquisition.

That loan matured at the end of last year, which is why we were able to take advantage of stepping in and providing a bridge. This new loan that replaces it, as I said, is five years interest only and we actually got a sub 3% interest rate, which is really extraordinary, and I think says a lot about not only the property and the credit at [Target] Corp., which is the major tenant there, but also just what's happening in the shorter term rate markets these days. It's really extraordinary.

We do anticipate additional potential real estate investment opportunities this year. We are actively working on some right now. And are very excited about those opportunities. We are very optimistic about the balance of 2012 and looking into 2013. Again, we have good property position opportunities. We're making good leasing progress on our portfolio. The, again, cost of leasing is coming down because we have such few lease roll over the next 2 1/2 years against the amount of revenue where we are receiving.

So we are very optimistic and, like probably everybody else, cautious when you look at the broader investing economy and will look on even all of the things that could potentially could go on in the negative side there. But I think the trend is our friend at this point. With that, I would open it up for questions

(Operator Instructions). Josh Patinkin, BMO Capital Markets.

Good morning. I am here with Rich, too. And I'd like to ask you guys about rent per square foot. I saw in the supplemental, if I'm reading it right, that it looks like we're quoting 2011 rent per square foot. So going forward in 2Q, what's the spread been looking like and do you think you're achieving pricing power there?

I think we had a couple of sentences in the MD&A on page 17 that covers the leasing for the six-month year to date, Josh. I don't have it right in front of me, but hang on one second. Leasing for the first six months of 2012, we leased 383,000 square plus feet of office space. It's about 295,000 of that was with existing tenants. A weighted average of about 4 1/2 years. The leasing, I think, was about 1.4% higher than average rents that we had in the 2011 schedule that you are referring to there.

Janet?

Do you want to anything, Janet or --?

Those numbers we are using for the first time are the averages of averages. And I think they are reasonably meaningful, depending upon what kind of leasing activity we're doing, I think what we've decided is that this is a good way to present it and we'll footnote or disclose this quarter where we have mostly renewables that that's part of what's driving it. If next quarter we have a big new lease that may be different, we'll flush that out. But I think it shows the trend.

Yes, and we thought this would be a good benchmark for comparison to look at this 2011 [GAAP] rents from each building in the portfolio and then compare our new leasing activity against that. We thought that might be a good way to do it.

Okay. Are there specific markets where you think, perhaps, it's turning in your favor and you're starting to see some compact commodity like product here gain traction in pricing?

I think, as George said, obviously, some markets are hotter than others, like Houston. But whether it's going to have an impact is going to depend upon whether we have vacancy in those markets. Sometimes we have already benefited to be able to see much on a portfolio basis for properties.

But I think broadly speaking, Josh, I think broadly speaking, our big rent rolldowns are over. And broadly speaking, in the vast majority of our markets, rents are firming and moving up. So we -- again, there are a lot of factors here and without continued broad-based employment gains in our economy, I think you've got a lid on all of this stuff to some extent, particularly in suburban office. But again, broadly speaking, we are off the bottom in rent levels and I would say broadly speaking our rents are moving up, not down, in virtually every market, and in some of the energy markets, certainly more than others.

Very good. And then on the Atlanta acquisition, if you guys could just give us some color on what the cap rate was and once you stabilize the property with the leasing activity you've been talking about, where you think the yield might go.

This is Jeff. Hey, Josh. The One Ravinia property was acquired at approximately 82% leased, and at that in place 82%, we were approximately a 7 cap rate. We have some leasing activity that started to spurt during due diligence, and if those leases are finalized, we will be in the neighborhood of 85% or 86% leased. We think that the Central Perimeter, as George mentioned, is positioned well for an Atlanta recovery that appears to have begun, particularly in Buckhead. But there is good leasing activity in the Central Perimeter.

We like this property from a locational standpoint and we believe that there is good and bad and growth, not only in the existing rent roll with rental rate increases, but also with additional leasing. And so I'm optimistic that we're going to see some nice growth in that property.

Great. And John, on G&A expense, I noticed they've moved upward this quarter. Is that recurring or do you think that will normalize next quarter and into the future?

I think with the G&A, you need to look at not only the G&A on the current income statement, but also what's embedded in discontinued operations. We've taken the staff and allocated between the investment bank and the real estate segments in the past. And as part of that transition, more G&A was allocated to the REIT, obviously, this year as we're not operating the investment bank in the similar fashion.

So you need to kind of look at the both of those combined. I think, combined, they are relatively flat, if I'm not mistaken.

Okay. Thanks, guys. I think Rich has a question as well for you.

Yes, hi. Good morning, everybody. So I wanted to -- on the loan payoff in Minneapolis, to what degree are you able to manage the timing? Because you've been quick to start the redeployment process already at $106 million. Is that just that you've been preemptive in terms of anticipating the refinancing, or were you able to govern the process, govern the timing a little bit so that you were ready to redeploy?

We certainly, once we completed the 18-year lease with Target for all of the office space, we clearly anticipated a refinancing. And so we were active looking for other investments early on. If you want to do just -- again, everything is fungible, but just the basic math. If you are getting back $106 million between the Energy Tower loan of $33 million and the One Ravinia purchase of $53 million, we've already redeployed $86 million of the $106 million. Again, $33 million of it actually almost a month early. And again, we have our eye on other acquisitions right now.

I think we will get all of that money redeployed in a reasonable amount of time, everything being equal. And as John mentioned, in his opening remarks, we are exploring some additional financing opportunities for continued growth.

So in other words, if it was a 6.5% return, maybe over 7% with fees you generated, you could actually turn accretive -- this into an accretive transaction, assuming you are buying at above 6.5%.

Yes, you can on the ongoing rate. I mean, one of the things that these interim or bridge loans have associated with them in the market is commitment fees and exit fees. When you put all those in, you can come up with a higher number on some of these interim loans, depending on the time frame the loan is outstanding. Obviously, this loan got paid off very, very quickly. But from an ongoing recurring point of view, we are absolutely accretive going from the loan to the One Ravinia purchase.

Rich, it's John. Q3 will be a little bit choppy to look at because we had the $33 million loan, as George mentioned, coming in in the beginning part of July. We're losing the Target loan for -- we only had that for part of July and, obviously, just bought Atlanta a couple of days ago. So, the parts moving in and out might make Q3 a little bit odd, but it will level out more in Q4 as we move along.

Perfect. Thanks, guys.

Jeff Lau, Sidoti & Company.

Good morning. I just had a quick question. Can you comment on the traction you're getting on Phoenix Tower and, again, how much interest you have in it?

Yes. We actually had the property under a purchase and sale agreement, Jeff. And it fell out. Our feeling is it just fell out for general market conditions, as I mentioned earlier. We have other buyers going through the property -- potential buyers going through the property, doing their chores, doing their additional due diligence. So I think we've got pretty good traction on it.

Again, we have some price expectations on the property that I think in a momentum market, like the energy markets have been, like Houston has been where you did have some cap rate compression, those price expectations can be met. We are so bullish about the properties long-term prospects that we aren't willing to just sell the property at any price or just let it go at what may be coming over the transom right now.

So the properties occupancy keeps rising. We have an equity ownership interest in the property as well as a loan on the property. So we are very bullish about ultimately selling it.

I think at the end of the day, it's going to be a momentum play relative to energy and where energy goes. And there's so many factors that are swirling around there right now. We'll just have to wait and see. If -- my anticipation is that if it's going to sell at a price that we think makes sense for us, that's going to happen within the next quarter or two. Otherwise, we will probably take that property off the market for a while and continue leasing. We have got -- there are leases in that property that are substantially below the market now and as those leases roll, we definitely can move up that NOI and adjust that cap rate accordingly to our new buyer.

So I think that's the game plan, in the market for another quarter or two at max if we can get our price, fine; if we can't, it comes out and we'll continue to own it for a while and let some of these leases, hopefully, roll up to market and do some more leasing at the property, then consider putting it back on the market at that point.

Okay. Great. And I guess you said -- you talked a little bit about some acquisitions you have an eye on right now. Any specific markets that you could tell us about?

We are looking basically in the markets that we are already in. We are not considering, at this point, opening up any new markets. We are acquirers -- cyclical acquirers. By that, I mean we work in generally big, non-land constrained markets and one of the disciplines requiring particularly suburban office and those types of markets, but even the CBD in those markets, is understanding the cycle of buying and selling. So when we look to acquire, we're always looking at markets that are down and hopefully close to a turn up and vice versa on selling.

So for example, this acquisition in Atlanta is a prime example of that. You might not see us acquiring in the energy markets any time soon because they are a little bit hot. We have acquired and sold a number of properties in, for example, Northern Virginia/Washington, DC, area. And that's a market that we're looking in right now because that market has started to fall on hard times a little bit.

So we'll just keep looking at markets that still have some value in them or have got some sort of cyclical opportunity in them. Atlanta will continue to be a market. Northern Virginia will be a market. Probably not the energy markets. Some of the Midwest markets still look pretty attractive from that cyclical acquisition sale point of view.

Okay. Thank you.

There are no more questions at the present time. I'd like to turn the call back over to management for any closing remarks.

So, I want to thank everybody for tuning into the call. We look forward to speaking with you next quarter. Have a great day.

This concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.