Franklin Street Properties Corp (FSP) 2013 Q1 法說會逐字稿

Good morning and welcome to the Franklin Street Properties Q1 2013 results conference call.

All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Scott Carter, General Counsel. Mr. Carter, please go ahead.

Good morning, everyone. Thank you for participating in our Q1 2013 earnings call. With me this morning are George Carter, our Chief Executive Officer; John Demeritt, our Chief Financial Officer; Jeff Carter, our Chief Investment Officer; and Janet Notopoulos, President of FSP Property Management.

Before I turn the call over to John Demeritt, 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, 2012, which is on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today, May 1, 2013. 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.

I will now turn the call over to John Demeritt. John?

Thank you, Scott. Welcome to our earnings call. We are going to be talking with you about our first-quarter results and I will start with a short overview. Afterward, George Carter, our CEO, will further discuss the quarter and FSP. I'm going to be brief; then we will be referring to our earnings release, the supplemental package, and the 10-Q that were filed yesterday and contain a lot of detail.

We produced solid results in the first quarter of 2013. FFO was $0.25 per share, or $0.01 per share over the first quarter of 2012. The increase in FFO was primarily from increased property income due to acquisitions we made in the last year and improved occupancy in the portfolio. Our same-store NOI was up 1.1% comparing Q1 2013 to 2012, primarily as a result of the leasing we have achieved.

Turning to our balance sheet and current financial position, at March 31, 2013, we had cash of $17.3 million and $278.2 million in availability on our credit facility, giving us about $295.5 million in liquidity. As of March 31, 2013, we had a total of $622 million in unsecured debt on our balance sheet and our total market capitalization was about $1.8 billion. Our debt-to-total market cap ratio was close to one-third of that, actually about 33.9%. We think this reflects a conservative balance sheet that can be used for growth.

We only have unsecured debt on our balance sheet and this debt structure continues to provide an attractive loan to value for our bank group. Our debt service coverage ratio for the first quarter was 5.9-to-1, which is the highest among some of the peers that I look at. We are exploring a number of additional financing possibilities with them currently to position us for more growth that we plan to achieve. We believe the balance sheet enhances our flexibility and will support continued growth.

This concludes my overview of our financial performance. As I said earlier, the earnings release supplemental information package and 10-Q filing are available on our website and provide more detail about our results. As always, we are happy to take questions at the end of the call.

I will now turn the call to George to provide further detail on the results and our portfolio as we look ahead. Thank you for listening. George?

Thank you, John. Good morning, everyone, and thank you for taking the time to listen to our first-quarter 2013 earnings call. As usual, my remarks today will generally follow my written commentary that was released in last night's earnings press release. After my comments, we will open the call for questions.

For those of you who have listened to past earnings calls, you know that John talks usually year-over-year quarterly numbers and I usually talk sequential, and we plan to continue that this year, so my comments usually are on a sequential quarterly basis.

For the first quarter of 2013 FSP's profits as represented by FFO totaled approximately $20.6 million, or $0.25 per share, which was essentially flat compared to the fourth quarter of 2012. Our directly-owned real estate portfolio of 37 properties totaling 7.8 million square feet was approximately 94.4% leased as of March 31. That's up from approximately 94% leased at the end of the fourth quarter of 2012.

We anticipate organic growth in rental revenue and FFO from our existing portfolio of properties in the second half of this year as we begin to realize the benefit of significant new leases signed in recent quarters and as continuing same-store rental increases positively affect profits. We have about 176,000 square feet of recently leased space that will actually commence their leases and rental contribution to FSP during the balance of 2013, the vast majority of that in the second half of the year and at an average GAAP rent of somewhere between approximately $23 and $24 per square foot.

Another 44,000 square feet which we have, again, already leased, will commence actually their leases and their rental contribution to FSP in 2014 at about the same average rents as I mentioned before. So we have what we would call some embedded organic growth to look forward to, we believe, for the balance of 2013 and into 2014.

Broadly speaking, the rents on FSP's portfolio of properties are rising. That's not on every property and it's not on every lease maturity, but the overall trend is up. The overall trend is certainly our friend.

Same-store rental growth was up 5% last year and is up over 1% in the first quarter of this year. We believe this trend is likely to continue. We have, on a portfolio basis, sort of made the turn. Our general mark-to-market is up.

Our property portfolio of office assets has relatively modest lease expirations over the next two years and we continue to proactively reduce that potential upcoming vacancy. As of the end of the first quarter, only 2.2% of our commercial square footage is scheduled to expire during the balance of 2013. And that is down from 3.6% at the start of the year. The 2.2% that's remaining, some of that, a lot of it actually, is month-to-month leases.

Overall tenant improvement expenditures and leasing costs continue to moderate in relation to the level of rental revenues being achieved, and we are optimistic that by year-end our portfolio's lease percentage can exceed its current 94.4% level.

Recently we put under purchase and sale agreement two new real estate investments in long-standing FSP core investment markets for a total acquisition cost of approximately $341 million. We believe both properties have superior near-term growth and value-add opportunities and are being purchased at substantial discounts to replacement cost. We expect to close on the purchase of both properties on or before July 1.

The first property is located at 999 Peachtree St. in the midtown submarket of Atlanta Georgia. It is 28 stories, totals approximately 621,000 rentable square feet, and is under agreement to purchase for $157.9 million.

The second property is located at 1999 Broadway in the central business district of Denver, Colorado. It's 43 stories, totals approximately 680,000 rentable square feet, and is under agreement to purchase for $183 million. We believe the successful acquisition of these two properties has the potential to add significantly to our anticipated growth in rental revenues and FFO this year and in the future.

I think shareholders should know that at the core of our current property acquisition strategy is our view of the most likely path the US economy will take going forward. Again, we have a large matrix of views and try to anticipate all the potential scenarios. But when we are talking about an acquisition strategy I think you have to pick one you believe in and this is our most likely view. And it is directing our current acquisition strategy.

That view is that we believe the US economy is in for a fairly long up cycle of very slow growth with probably some numerous soft patches in that upward cycle. However, again, our best and most likely scenario is that we don't see any significant long-term or deep recessions occurring in this up cycle, or significant and dramatic financial crises like occurred in 2008 in this view. So long is think 10 years; slow growth, think 1% to 3% GDP; slow, very slow employment growth.

In that view's perspective then, property acquisitions in our core markets, markets that have strong overwriting macro economic growth drivers are really where we are headed. Macroeconomic growth drivers, for example, like energy and housing would be examples -- and energy can relate to our Denver acquisition and housing has always been one of the drivers in Atlanta that can relate to our Atlanta acquisition.

We are definitely focusing on acquiring in our core markets urban, more urban infill and CBD, edge city type of properties. We are looking to buy value. That is properties significantly below estimated replacement costs, properties that have on a property level current rents that are below the markets -- market rents, and properties that have some nearer term value add opportunities.

We believe that these, in our economic view perspective, will be better long-term holds, that they will show better long-term rent growth, and eventually --- and this may be some time out -- when new properties start to get built again, the value basis that we purchase these properties at will put us in good stead to be very, very competitive.

There are value buys today that I think will give excellent current rates of return and great long-term inflation protection, and that is really driving our acquisition thoughts at this point.

I also think that shareholders should or might be interested to know that we are seeing a continuing strong property acquisition pipeline in our core markets where we have very positive macroeconomic drivers and where we are very well known in those markets to sellers of properties. And we have seen a change in the last few years of the sellers and types of properties that are coming to market.

If you go back to 2008, 2009, and 2010 where we did some acquisitions in those real, real tough years, we were careful definitely seeing distressed sellers. Now it might not have been a distressed asset, per se, that we acquired, but there were distressed sellers that had either a distressed asset or other real estate assets that were causing them to sell properties, good or bad.

And the fear from those sellers there was a potential loss of capital. Again, we did some acquisition in that timeframe.

If you move forward to the -- starting in 2011, 2012, now in 2013, and we think beyond, the sellers in our core markets with properties have basically gotten over the abyss. They've made it to the other side and so you don't have this fear of loss of capital. But what you have is owners of properties that have had their money tied up, their capital tied up much longer in those properties that they ever anticipated.

The properties that we are seeing are not properties from liquid REITs where capital can sell shares to get liquidity. They are in funds, foreign funds, domestic funds. They are simply groups of owners or partnerships that have owned properties that, again, have made it to the other side of the canyon with their properties, have had to lower rents to lease up vacancy, consequently lowered NOI and values, near-term values on the property.

But, again, have gotten to the other side of the canyon and see now to the potential to get liquidity. Liquidity that they had hoped for, hoped to achieve long, long ago.

We are getting the calls from those sellers. Those calls are for properties like Atlanta that we have under PNS now and like Denver we have under PNS now that have what we believe to be great values relative to replacement cost and extended rental growth in our view of along slow growth up cycle. So we are very positive about our acquisition opportunities going forward.

As the second quarter of 2013 begins, we will maintain our focus on continuing to grow profits by increasing occupancy and rents in our existing property portfolio while acquiring additional real estate investments that have the potential to meaningfully contribute to that effort. With our occupancy and rents rising, and with a strong acquisition pipeline, we continue to be very optimistic about our prospects for growth during 2013 and beyond.

With that, I will open the call for questions.

(Operator Instructions) Rich Anderson, BMO Capital Markets.

Thanks. Good morning, everybody. George, I see you guys are a REIT now. Do you know what I mean by that?

No, Rich. Why don't you explain that? I thought we always were, but ---.

Okay. So in the first paragraph you are a real estate investment trust. As long as I've known you, you have been an investment firm specializing in real estate. I'm wondering why the change in language there.

Well, I think at the end of the day it is because we have now let go our investment banking business and that investment banking business really I think maybe puts you more over in the category of that description. But as you know, we have always been a REIT.

I know that. I was being tongue-in-cheek.

That is, I think, the answer to you.

Maybe a little bit more serious line of questioning, you've mentioned CapEx; TI dollars are trending down, rents are trending up. In kind of an uncertain world still from an economic standpoint, what do you think the reasons are that you are seeing a shift more in favor of landlords today?

Well, again, if you look at the broader office markets, in general you might even question whether you are seeing a more favorable shift to landlords. I think in our portfolio and in the markets that we have targeted that again have these big macro drivers that seem to sort of overtake all of the other issues, we are seeing that in our portfolio and in those markets.

But there hasn't been much speculative construction, as you know. There has been some build-to-suit, so you have supply very constrained. You've had financing very constrained and now all of a sudden you have in energy markets and housing-sensitive markets in sort of global communication, domestic communication, global and domestic transportation hubs, even in some of the Midwest food and agricultural macro drivers, you have various markets tightening up.

And you have rental levels, while coming off the bottom here and trending up in those markets, they are not nearly high enough yet to support any sort of speculative supply coming on board. So we are -- generally speaking, I would say that's why we are tightening up.

Specifically, for FSP too we had --- the bad news is we had a lot of lease roll in 2008, 2009, and particularly 2010. Those were the toughest years to have that lease roll, so a lot of our rents did roll down significantly during that period and so we are at a fairly low base. But, again, the trend is solid across our portfolio and in our markets in general. So that gives you some color to it, I'm glad.

That does. Very helpful, thank you. Regarding what you call embedded growth, you said -- I think you said 176,000 square feet of recently leased space, is that right?

That would be for -- that is approximately the balance of 2013 that will be -- we anticipate that coming on.

Okay. So not yet leased, but to be leased?

No, no, it's leased.

Oh, coming -- I understand, I understand. Not occupied.

Those leases have not commenced yet and started to contribute to rent. Most of that space, the 176,000 square feet this year and the 40-some-thousand next year, most of that space is in the process of build out right now in preparation for those tenants' leases actually commencing. Once they commence that rental income then starts to contribute.

Okay. So if you add $1.1 million positive on the same-store NOI line this quarter, how do you think that could trend? Do have any sense of how much bigger that number could get over the course of the year as you trend out?

No, but again I think -- I can't give you an exact number but, again, I think we are fairly positive that -- quarter to quarter it didn't move around, but we think that trend is established in our portfolio. Again, qualified under the scenario that the economy continues its sort of slow growth mode. No one is going to be exempt if we have a big setback in the economy, but continuing where we are, we think that trend is up for us.

Okay. Just one more quick topic here on the acquisitions. Can you talk about cap rates on Atlanta and Denver, and if -- or maybe on the level of occupancy and to what degree these are opportunistic investments?

I will let Jeff give you some color there. Again, these are properties that are not yet acquired and so we have to be a little careful here, but I will let Jeff give you some color.

Rich, this is Jeff. For both acquisitions -- relative to both acquisitions, Franklin Street has been acquiring our most recent acquisitions typically in the 6.5% to 7% cap rate range, and you will see both of these assets fall into that line.

From an occupancy standpoint, we don't own the assets and I'm not going to give a lot of detail on rent rolls or leases or anything of that nature, but these assets are both over 90% leased.

Okay. Then, finally, George or whoever, can you talk about --- you talked about the deep pipeline of investments going forward. Can you talk about that with a little bit more color on the relationships? Why are you getting these calls from motivated sellers and is there something specific that you have from a relationship standpoint that puts you in a competitive advantage position to get that phone call?

Rich, this is Jeff again. I think one of the reasons why we have had these advantages that have played out for us over the last several quarters and years relates to our reputation in the marketplace. We have a very proud track record of closing on time and on price and performance, and that performance has led to consistent repeat business with some really fine names in the industry across many of our core markets. Those relationships have been very fruitful and continue to produce strong results for us in looking at opportunities.

We have registered --- this is George. The other thing is that we are a purchaser, as John Demeritt has said, that does not have any property-secured debt. We don't have a single property with a mortgage on it; don't anticipate one. So we are acquirers, from a seller's point of view, all-cash. We do not have a financing contingency upon our acquisitions.

So if a seller is in distress or a seller really wants to know they've got liquidity coming, finding a buyer with the kind of reputation Jeff has talked about that does not have a financing contingency is a reason for a phone call.

Great. Thanks for the color, guys.

Dave Rodgers, Robert Baird.

Good morning. George, I wanted to go back to the kind of leasing spreads and the portfolio mark-to-market that you referenced in your comments. I don't know that you gave a spread number or that you have that available, but I guess here's my thought.

In the supplement you did give a 10% increase in GAAP rents year over year. That's clearly for the total portfolio. Can you have is a sense of how much that might be of rent versus just mix as you have leased up the portfolio?

I can't; I don't have those numbers. Certainly a meaningful amount of it was acquisition work, absolutely, but, again, a meaningful amount was same-store sales. We've had -- again, I don't look at all the peers. But looking at the broader office market, our same-store sales growth, which is a part of that effectively, about 5% last year and again continuing this year was a meaningful part of it. But also acquisitions were as well.

I guess you don't have much rolling this year, most is month-to-month, but as you look at in the near term you said most properties, not all, are rolling up or at or below market. Is that true in the very near term as well that we shouldn't really expect to see much volatility in that number, or any risk on the downside?

There's always risk on the downside, Dave. I don't care what you are talking about.

But to answer your question is, yes, I think our portfolio, as a broad statement -- again, there will be specific tenants that will be roll downs. There will be specific leases that will be roll downs. Broad statement is we are marking to market up and I think that will be the overwhelming, again assuming the economy stays in this growth mode, even slow growth mode, that will be the overwhelming fact.

I guess, going back to your comments as well regarding stability, the economy, and steady growth, the way you termed it in your comments, does that change kind of how you view leverage on the portfolio and what the target might be? You have historically run very conservatively. Any thoughts about kind of maybe pushing toward the peer group more in time?

I don't think so, Dave. We had been -- prior to the financial crisis and recession, we had been a REIT that pretty much was all cash. We didn't really have any significant debt at all, and that put us in good stead obviously for that downturn on two fronts. One is the survival front, but the other is the growth front and the acquisition front.

And so we started to use our lines of credit and termed out some debt to do some acquiring, and have gotten very comfortable right now with this flexible unsecured financing package, which really allow --- when I say flexible, that really does reduce a lot of risk because you don't have any property, any specific property that's tied up with debt. You can liquidate properties without being concerned about debt if you needed to, wanted to, thought there was an opportunity to.

That flexibility to us is important. A lot of the properties that we have purchased are from -- over the last few years have been from sellers that did not have that flexibility and got hurt because of it. So when you add this sort of one-third debt, two-thirds equity model, which is sort of where we are at now, we think that is a good long-term model for FSP. Particularly in the light of our debt service coverage ratios, which are fairly -- again, relative to the leveraged office market are relatively strong and in relative terms to our flexibility.

So I think you will see us now very comfortable and going forward very comfortable; one-third debt, two-thirds equity. Again, that can accordion up a little bit if we are heavy in acquisitions and we then get taken down with equity at the right time during a different period of time. So if you think of FSP that way -- unsecured debt, one-third debt, two-thirds equity -- I think that's the long-term view of FSP.

I guess maybe to John regarding the debt side of that equation, it looks like you will be fully drawn or thereabouts on the line or the revolver by midyear when you take down the acquisitions. At least as you run today. You have got the term loan drawn.

How do you think about financing that one-third of the debt component going forward? Do you think about tapping the unsecured debt market here from a public bond perspective? Should we expect to see you go back to do a term loan or do an expanded accordion on the revolver? Give us a sense of how you're thinking about the debt component of that in the near term.

I think we're looking at a lot of different financing possibilities. You mentioned the $250 million accordion, what we have on the line with our existing bank group. That's certainly something we can talk to them about and we can also look at potential other term loans or other activities like that as we look ahead. We've already had some discussions with some people in the bank group on that too.

I think with our current debt to total market cap and our debt service coverage ratio that George reiterated, I think we are pretty attractive to the bank group right now and there's a lot of possibilities for us.

I guess last question. As we think about funding, are you marketing any properties, either owned or managed the way you've termed it, at this point or expect to throughout the course of the next three to six months?

We certainly are looking at properties, both in the wholly-owned portfolio and in the asset managed portfolio for consideration of sale. We do not have any in the market right this moment.

All right, great. Thanks for all the color.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. George Carter for any closing remarks.

Just thank you all for taking the time again. We appreciate it and we look forward to talking with you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.